Small businesses risk running out of cash after post Brexit banking rules rollout

New banking regulations could increase the cost of small business lending by around a third and “fundamentally change” the market as debate around the implementation of international banking rules in the UK intensifies. 

Regulators in the UK are scrutinising the latest round of Basel regulations, the global regulatory overhaul prompted by the financial crisis. 

Concerns have been raised that the approach taken by the UK could squeeze credit supply and raise the cost of small business lending. 

Richard Davies, chief executive of Allica Bank, told City A.M. that the new regulations would increase capital requirements in the sector by around a third and would “fundamentally change the market if they go ahead”. 

There are two aspects of the Prudential Regulatory Authority’s (PRA) consultation paper that have drawn attention. 

First, the PRA’s regime will cut from international standards by imposing higher collateral limits on secured business lending than unsecured business lending. 

Secondly, the PRA has not followed the EU in keeping lower capital requirements for small business lending.

This policy was introduced in 2014 while the UK was still in the EU but it will not carry on under the latest proposals, the first since Brexit. 

These two issues, Davies said, will have a “very material effect on small business lending. We estimate the overall impact is 34 per cent higher capital requirements”  for lending in the SME sector.

This will reduce the availability of loans to SMEs and increase their cost, Davies said.

Karen Bradley, chair of the challenger bank all-party parliamentary group told City AM there was “concern among parliamentarians” about the effects the proposals will have on “challenger banks who lend to SME’s and the ability of the SMEs themselves to raise funds.”

The news comes after Bloomberg reported that City minister Andrew Griffith suggested banks could sue the Bank of England over the new rules.

Griffith is said to have raised the prospect of legal action during meetings with firms worried about how Britain will interpret the newest Basel reforms. 

A Treasury source said “the minister recognises the PRA’s role as the independent regulator, and its responsibility for aligning the UK with strong international banking standards.”

The PRA has must consider retaining financial stability, international standards and competitiveness in its regulations. 

In a speech discussing the PRA’s approach to the Basel 3.1 regulation in December, the Bank of England’s director of policy Phil Evans said “lower confidence in the stability of our financial system… [would] undermine competitiveness and growth.”

However, Evans specifically picked out small business lending as an area “where I would very much encourage firms to have a strong level of engagement with our consultation”.

The Bank of England has been contacted for comment.