Opportunity for non-bank lenders as PRA rules put £44bn of SME lending at risk
Non-bank lenders could benefit from new regulations which could place up to £44bn of bank-funded small business loans at risk.
Banking watchdog the Prudential Regulation Authority (PRA) has proposed introducing a more risk-based approach to new business lending capital rules.
But Allica Bank has warned that the proposals could result in small- and medium-sized enterprises (SMEs) losing access to up to £44bn in bank funding.
Allica Bank’s research found that under the PRA’s new proposals, the risk weighting for secured SME lending would be higher than for unsecured lending to SMEs, stating that “this is illogical and incentivises riskier lending which is not aligned to the PRA’s own objectives to make capital rules more risk sensitive.”
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“The overall effect of the increase in risk weighting, assuming no change in either the level of capital held by banks or the capital-risk-weighted asset ratio with which they operate, would be a reduction in SME lending of up to £44bn from the banking sector,” Allica Bank concluded.
However, the proposals could present an opportunity for non-bank lenders who are not regulated by the PRA. This includes peer-to-peer lending platforms and other marketplace lenders.
Allica Bank’s chief executive Richard Davies has urged the PRA to revisit its proposals in order to ensure that there is more choice for business borrowers.
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“This transformational change in the UK banking market has helped to create a more robust, diverse and responsible SME finance market for Britain’s army of small business owners, the engine room of our economy,” Davies said.
“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.
“It’s really a golden opportunity to continue to cement the gains made in increased competition in the SME banking market while meeting the PRA’s prudential objectives.”
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