Labour and Conservatives promise new banking rules won’t dent small business lending
Both major parties, Labour and the Tories, have promised that the latest overhaul of the banking regulatory framework will not impact lending to small and medium sized enterprises (SMEs).
With the Prudential Regulation Authority (PRA) set to announce its plans for the latest round of Basel rules in a matter of months, the fate of small business lending has been a major concern for lenders and SMEs alike.
When the initial proposals were released in December 2022, many in the industry warned that they could severely impact lending to SMEs.
Ahead of the election, both parties have pledged to ensure that SMEs can access the finance they need.
“Labour has always been clear the implementation of Basel III rules must be implemented in a way that considers the needs of the British economy and ensures our small businesses continue to have access to affordable finance,” a Labour spokesperson told Morning Wire
Labour’s comments more or less matched a Conservative commitment, contained in the manifesto, to “ensure that Basel III capital requirements do not inhibit lending to SMEs”.
The current round of Basel rules, known as Basel 3.1, forms the latest in the major overhaul of banking regulation that started shortly after the financial crisis.
The Prudential Regulation Authority (PRA)’s first round of rules proposed removing the SME Supporting Factor, which would force SME lenders to hold a higher level of capital against loans to the sector.
Banks would also have had to hold a higher capital level against secured loans compared to unsecured loans.
The proposals were criticised by many in the industry, with research suggesting it could increase the cost of lending by around a third.
Martin McTague, national chair of the Federation of Small Businesses (FSB) described the potential removal of the support factor as a “looming threat” for small businesses.
“It is welcome that both Labour and the Conservatives have committed to changes to protect the flow of funding to small firms,” McTague told City A.M.
“That this commitment has been adopted by the two parties with the highest chances of occupying 10 and 11 Downing Street in a fortnight’s time gives hope that the issue will be tackled,” he added.
Richard Davies, chief executive of Allica Bank, told Morning Wire that a “well considered and proportionate” implementation of the Basel rules was crucial to avoid a hit to growth.
Similarly, Simon Hills, director of prudential, reporting and taxation policy at UK Finance, said the new Basel rules could have “a real impact on SME lending in the market” if they went too far.
UK Finance has called on the PRA to maintain the SME supporting factor, or at least provide a transition period for firms to adjust.
A Bank of England spokesperson said: “The PRA’s work on the Basel 3.1 banking rules is now in its final stages, and we expect to publish our decisions and the remaining rules as soon as possible after the general election.”