The Bank of England is right: £25bn in assets isn’t that much for an SME lender
Mid-tier banks have long faced regulatory hurdles that hinder growth, especially the minimum requirements once a lender’s assets reach £15-£25bn. Thankfully that’s about to change, but that should be just the start of reforms, says Nigel Terrington
Each week, my commute to Paragon’s Solihull headquarters takes me past HS2 construction sites, bustling with heavy machinery and equipment. These assets, essential to the UK’s largest infrastructure project, are often financed by institutions like Paragon or our fellow mid-tier banks – those operating just below the high street giants.
HS2 is a powerful illustration of how mid-tier banks underpin economic growth. Nearly two-thirds of the 2,700 suppliers involved are SMEs, many of whom rely on our sector for funding. We provide capital where larger banks often hesitate, whether due to lack of interest, expertise or a strategic retreat from certain markets.
A 2023 EY report revealed that mid-tier banks were responsible for 60 per cent of SME lending last year, totalling £35bn. While this is a substantial contribution, it also highlights the untapped potential within our segment. The Chancellor has rightly placed growth at the heart of the government’s agenda, and mid-tier banks are ready to support this ambition, particularly by empowering SMEs, which represent 99 per cent of UK businesses and employ nearly 17m people.
Despite our vital role, mid-tier banks have long faced regulatory hurdles that hinder growth. That’s why we welcome the recent focus from the Chancellor and the Bank of England on creating a more proportionate regulatory environment – especially around capital requirements for scaling banks.
A key issue has been the MREL (Minimum Requirement for Own Funds and Eligible Liabilities) threshold. Once a bank’s assets reach between £15 and £25bn, it must hold additional capital, rules originally designed for institutions deemed “too big to fail”.
For context, Lloyds and NatWest hold over £800bn and £600bn in assets respectively, yet the same rules applied to banks with just £15bn
For context, Lloyds and NatWest hold over £800bn and £600bn in assets respectively, yet the same rules applied to banks with just £15bn. This mismatch has imposed disproportionate costs on mid-sized banks, making it expensive to issue MREL debt and increasing refinancing risks. It has also discouraged growth, with some banks deliberately slowing expansion or avoiding mergers to stay below the threshold.
The Bank of England’s recent decision to raise the MREL threshold to between £25 and £40bn is a welcome development. It provides breathing room for many mid-tier banks and signals a more proportionate approach.
Crucially, the Bank has committed to reviewing the threshold every three years in line with nominal GDP growth, creating more certainty for those on the path to scale. This change reduces unnecessary costs for non-systemic banks without compromising financial stability, enabling us to redirect resources toward supporting businesses, funding innovation, and driving regional development.
However, MREL is just one piece of the puzzle. Real change won’t be achieved through tactical adjustments alone. What’s needed is a clear strategic direction for the UK’s financial services sector.
Banks should be able to assess their own risks
Reforms to the overarching regulatory framework – such as those proposed in the Financial Services Growth and Competitiveness Strategy – will be key, as well as fine-tuning and accelerating the IRB process, the system by which banks develop their own models to estimate key risk components, for smaller operators.
The UK is an excellent place to start a bank, but scaling up remains a challenge. No mid-tier institution has yet broken through to rival the dominance of the high street incumbents. The past year has underscored this difficulty. Since the EY report, four mid-tier banks have been acquired or merged with larger players, with another likely to follow. Others have scaled back, selling assets or slowing growth to avoid regulatory thresholds that trigger costly compliance burdens.
A robust, well-capitalised mid-tier banking sector is essential for a dynamic economy. We offer competition, choice and tailored support to SMEs, homebuilders, borrowers and savers alike. The high street banks cannot meet the UK’s growth needs alone.
SMEs depend on us to scale, recruit, and innovate. Mid-size housing developers rely on our funding to build the homes Britain urgently needs. And savers turn to us for better rates and more personalised service.
With the right regulatory environment, mid-tier banks can do even more to power the UK’s economic future – and these changes are a step in the right direction.
Nigel Terrington is CEO of Paragon Banking Group