Report: PRA Capital Rule Changes Risk £44bn SME Lending

According to research paid for by Allica Bank, the UK Prudential Regulation Authority’s plans to change bank capital rules could put up to £44 billion of SME loans at risk.

In December, the PRA proposed changing the rules for bank capital. One of the changes was to make it much harder for banks to lend to small and medium-sized businesses (SME).

Research from the economics and finance firm Oxera, which was paid for by the SME lender Allica, shows that up to £44 billion of SME lending is “at risk” if new SME lending capital rules are not made more risk-based and fair.

The report says that under the PRA plan, the risk weighting for secured SME loans would be higher than for unsecured SME loans.

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”.

Also, the risk weighting that must be put on loans to SMEs for challenger banks that use the so-called Standardised Approach to figure out how much capital they need would go up by more than 30%.

Allica wants the PRA to change its plans to get rid of the 100% minimum risk weight floor for SME business loans backed by property. This would make unsecured SME loans riskier than secured loans.

The bank also wants the PRA to bring unsecured SME lending in line with the current proposals, using 75% risk weights for smaller loans and 85% risk weights for larger loans to SMEs. It says that this could meet the PRA’s overall goals and implement a risk-sensitive basis for capital requirements without making the capital requirements much higher, which could hurt the SME economy in a big way.

CEO of Allica Richard Davies 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.”