Could new PRA legislation put SME lending at risk?


A study by Allica Bank has found plans by the UK Prudential Regulation Authority to change bank capital rules could put £44bn of SME lending at risk.

According to Finextra, back in December the PRA put forward an overhaul of bank capital rules that include a move to increase the level of risk-weighting banks would need to apply to SME lending.

Research from economic and finance consultancy Oxera – which was commissioned by SME lender Allica – found that up to £44bn of SME lending is ‘at risk’ if a more risk-based and proportionate approach to new SME lending capital rules is not implemented.

The PRA plan would lead to the risk weighting for secured SME lending being higher than for unsecured lending to SMEs, the report found. Allica claims this is ‘illogical’ and ‘incentivises riskier lending which is not aligned to the PRA’s own objectives to make capital rules more risk sensitive’.

Furthermore, challenger banks using the Standardised Approach to measure their capital requirements would see a climb of over 30% in the risk weighting that must be assigned to loans made to SMEs.

Allica has called for a change to the PRA plans to remove the 100% minimum risk weight floor for SME business loans secured on property. This would mean unsecured SME loans would have lower risk weights than secured loans.

Allica Bank also stated that it wants the PRA to put unsecured lending in line with the current proposals, applying 75% risk weights for smaller loans and 85% risk weights for larger loans to SMEs.

The bank said that through this, this could achieve the PRA’s over-arching objectives, while also implementing a risk-sensitive basis for capital requirements, without materially increasing the capital required which could cause substantial damage to the small and medium sized enterprise economy.

Allica CEO Richard 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.”

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