Bank of England has revealed its plans to change the capital treatment for small business (SMB) lending, calling for a more risk-based approach

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The Bank of England’s Prudential Regulation Authority considers changing the capital treatment in small business lending. In particular, BoE proposals include the removal of favourable treatment for SME loans implemented in the EU in 2014.

The proposed changes are part of broader efforts to introduce?the final package of Basel III rules in the UK. This set of?international banking regulations was developed by the Bank for International Settlements (BIS) to promote stability in the global financial system.

Basel III regulations are aimed at minimizing the damage done to the economy by banks that take on too much risk. Therefore, UK regulators also call for a more risk-based approach to SMB lending.

However, the proposals include one controversial point that makes SMB?lending backed by the property more expensive than unsecured loans. The mismatch occurs due to the current state of capital charges on property-backed loans.

The proposed changes would significantly affect lending levels both for legacy institutions and challenger banks. According to an Oxera report cited by ft.com, it could potentially cause a ￡44 billion drop in lending to UK SMEs.

The?market impact could be somehow mitigated only by increasing the activity of non-bank lenders.

The National Association of Commercial Finance Brokers (NACFB) urged the PRA to reconsider these changes, focusing its efforts on supporting economic growth and competitiveness by propping up SME lending instead.

In addition, the uneven benefits would?encourage banks to offer unsecured rather than secured business loans. It would disrupt lenders’ risk management efforts.

The PRA proposals are currently under review, with consultations scheduled to end in April 2023.

In 2022, applicant banks and specialized banks in the UK provided more loans to small businesses than traditional large players in the relevant services market for the first time in the history of banking.