To protect lending to small and medium-sized businesses, Allica Bank has asked the PRA to look into new bank capital requirements.
The Prudential Regulatory Authority (PRA) is being urged by Allica Bank to alter the proposed new bank capital criteria in order to protect the UK’s SME challenger bank industry and guarantee small businesses have access to financing.
In November 2022, the PRA launched a consultation on Basel 3.1 implementation. The consultation comprises recommendations that would require banks to apply significantly more risk-weighting to SME financing.
The PRA’s present proposals, according to new research commissioned by Allica, might ‘risk’ £44 billion worth of SME credit.
Oxera, an economic and financial firm, found that challenger banks using the Standardised Approach will increase risk weighting for SMEs by over 30%.
Challenger and specialty banks will lend 55% of small firm gross credit, according to February 2022 British Business Bank data. The challenger banks’ record share relative to the “Big 5” banks showed their relevance in the UK’s SME credit market.
Proposed modifications
The risk associated with various forms of SME lending has been thoroughly documented by Allica and presented to the PRA. It also advised changing the PRA’s intentions to create a risk-sensitive capital regime without raising capital.
The PRA helped Allica Bank CEO Richard Davies create a more varied and competitive banking sector. The army of small business owners in Britain, who represent the backbone of our economy, now have access to a more robust, diverse, and responsible SME credit market, according to Davies.
By aligning its new capital rules with lending risks, the PRA may avoid a substantial impact on the SME industry in two to three years. It’s a terrific chance to consolidate SME banking competition gains while meeting PRA prudential goals.
In favor of the new analysis
The National Association of Commercial Finance Brokers (NACFB) and the Federation of Small Businesses (FSB) have both requested that the PRA offer a more thorough analysis of how their recommendations would affect the SME credit market and the actual economy.
Martin McTague, FSB national chairman, said the PRA may pursue its secondary goals to boost UK economic development and competitiveness. The PRA should provide factual data and cost-benefit evaluations for SME financing to determine if the proposed revisions are necessary.
Allica’s recommendations
Eliminate the PRA’s proposed 100% minimum risk weight floor for SME company loans secured on property. This would exceed international rules, making unsecured SME loans riskier than secured loans and encouraging banks to lend.
Establish a new risk weight for equipment and invoice finance lending to SMEs at 69 percent, which is the existing average of the SME Support Factor and the PRA’s Pillar 2A benchmark risk weight for SME lending.
Apply 75 percent risk weights for smaller loans and 85 percent for bigger loans to unsecured SME financing.
