Senior Tory MP questions impact of planned changes to capital rules on UK SMEs

The Conservative chairman of the House of Commons treasury committee has questioned why proposals to overhaul UK banking capital rules include measures that would hurt lending to small businesses.

Harriett Baldwin’s intervention came after the Financial Times reported that the controversial plans – part of a wider proposal by the Bank of England Prudential Regulation Authority to introduce the final package of Basel rules in the UK – risked a 25 per cent rate on loans to SMEs reduction. .

The fine print of the package calls for ending favorable treatment for SME loans, known as the “SME support factor”, which was introduced in the EU in 2014, when the UK was still a member of the bloc, and what regulators called . a more “risk-based” approach.

“It would be difficult to use the Brexit freedoms to do something that no one else is doing by tightening lending conditions for SMEs,” Baldwin said, adding that it was too early to know exactly what the PRA would do. The regulator is holding a consultation which will conclude next month.

He said the commission had written to business groups – including the CBI, the Federation of Small Businesses and the British Chambers of Commerce – to get feedback on the proposals.

Consultants Oxera have estimated that the changes could reduce lending to small businesses by £44 billion. The banks’ total lending to SMEs, excluding the government’s coronavirus-inspired bounce back lending programme, is around £165bn.

Alex Veitch, the BCC’s director of policy, said: “Limiting the risks to the UK economy makes sense, but the danger does not lie in the booming banking sector of smaller firms.”

He added that it would be a mistake to remove the SME support factor, as this will have a very real impact on businesses that will then find it more difficult to get financing.

Institute of Directors chief economist Kitty Ussher said she would raise similar concerns in a submission to the PRA’s consultation.

But another executive said the recent crisis in the financial services sector might make the proposed loosening of bank capital rules less sympathetic.

Sam Woods, head of the PRA, told a Treasury select committee earlier this month that he was awaiting feedback on the impact on SMEs and would keep an open mind about the situation.

“It’s worth mentioning that the whole point of the reforms is to make sure we capture the risks properly. That’s because if you don’t, the chicken will come home when there’s a downturn, and that’s when you want credit to be available,” he said.

The BoE’s proposals also include an element that would make property-backed lending to small businesses more expensive than unsecured loans – because property-backed loans have high capital costs.

The PRA declined to comment.