The UK Prudential Regulation Authority's plans to change bank capital rules could put up to £44 billion of SME lending at risk, according to research commissioned by Allica Bank.
In December, the PRA proposed an overhaul of bank capital rules that includes a move to materially increase the level of risk-weighting banks would need to apply to Sme lending.
Research from economic and finance consultancy Oxera, commissioned by SME lender Allica, suggests that up to £44 billion of SME lending is ‘at risk’ if a more risk-based and proportionate approach to new SME lending capital rules is not implemented.
The PRA plan would lead to the risk weighting for secured SME lending being higher than for unsecured lending to SMEs, says the report. This, says Allica, is "illogical and incentivises riskier lending which is not aligned to the PRA’s own objectives to make capital rules more risk sensitive".
In addition, challenger banks using the so-called Standardised Approach to measure their capital requirements, would see an increase of over 30% in the risk weighting that must be assigned to loans made to SMEs.
Allica is calling for a change to the PRA plans to remove the 100% minimum risk weight floor for SME business loans secured on property - which would mean unsecured SME loans would have lower risk weights than secured loans.
The bank also wants the PRA to put unsecured SME lending in line with the current proposals, applying 75% risk weights for smaller loans and 85% risk weights for larger loans to SMEs. This, it says, could achieve the PRA’s over-arching objectives, while also implementing a risk-sensitive basis for capital requirements, without materially increasing the capital required which could cause substantial damage to the SME economy.
Richard Davies, CEO, Allica, says: "With a more risk-based approach to new capital rules, aligning the PRA’s proposals to the actual risks associated with lending, the regulator could avoid a really negative impact on the SME economy in the next two to three years."