12 September 2024
As part of the Basel 3.1 reforms announced today, the PRA (Prudential Regulation Authority) has signalled it intends to limit the effects of withdrawing the SME supporting factor by introducing a ‘lending adjustment’ to avoid the risk of lenders increasing SMEs’ borrowing costs once the Basel 3.1 reforms are introduced in January 2026. RSM UK says this should enable SMEs to continue to access funding they need to grow and allow them time to adapt to new lending rules.
Gavin Sharpe, associate director at RSM UK said: “The introduction of the SME lending adjustment is a vital step towards ensuring the continued growth and stability of SMEs in the UK. SMEs play a vital role in the UK’s economy, employing millions and contributing significantly to UK GDP. The PRA’s decision to reduce the capital impact of the removal of the supporting factor is crucial to ensuring SMEs can now access the financial support needed to thrive. It also enables the Treasury to deliver on its broader goal of maintaining financial stability while supporting economic growth.”
There are 5.5m SMEs in the UK, representing over 99% of the business population and supporting 39% of UK jobs. The removal of the SME supporting factor, as initially proposed under Basel 3.1, was intended to ensure lending costs were more closely aligned to the underlying risk of default. This would have increased the cost of small business lending, further depressing lending activity in an already challenging economic environment, with high interest rates and reduced affordability.
Gavin Sharpe continued: “The link between the SME supporting factor and stimulus in the small business lending market has been questioned extensively throughout the Basel 3.1 consultation period. Data published by the Bank of England appears to show limited evidence of the impact of the capital benefit since implementation. The lack of a notable uptick in the market could in fact relate to an underlying lack of demand.
However, it’s clear that SMEs do typically rely heavily on external finance for their operations, investments and cash flow management. Without the lending adjustment, it’s likely banks would have been less inclined to lend to SMEs, exacerbating the financial strain on these businesses. The capital requirement offset helps mitigate this risk, ensuring that SMEs have continued access to the credit they need to sustain and grow their operations, without compromising the safety and soundness of financial institutions.”