The new rules, which are part of the broader Basel III reforms, were to set to come into force in January 2025, after years of delays from the initial target of January 2021, with many speculating that the Bank of England is preparing to unveil a July 2025 implementation deadline in the coming weeks, in line with the July 2025 date announced by the US over the summer.

In response to reports the Prudential Regulation Authority (PRA) may consider delaying the implementation of Basel III reforms, Richard Davies, Chief Executive of Allica Bank, said: “The PRA’s consultation on new bank capital rules are a big deal for the SME finance market – research by expert economists at Oxera found that up to £44 billion of SME lending could be put at risk if we don’t get the new rules right. So while reports of a delay in the PRA publishing final rules may be frustrating for some, it suggests regulators are listening to the concerns many of us across the SME finance market have raised and the PRA is working on making the new rules much more with the risk-sensitive when it comes to SME lending.”

Based on research by economic and finance consultancy Oxera, the PRA’s current proposals could put up to £44bn of SME lending ‘at risk’ if a more risk-based and proportionate approach to new SME lending capital rules is not implemented.

Oxera’s detailed analysis of the PRA’s proposals found that:

  • the risk weighting for secured SME lending would be higher than for unsecured lending to SMEs – this is illogical and incentivises riskier lending which is not aligned to the PRA’s own objectives to make capital rules more risk sensitive;
  • challenger banks, using the so-called Standardised Approach to measure their capital requirements, would see an increase of over 30% in the risk weighting that must be assigned to loans made to SMEs; and
  • 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 believes that the following is essential in the PRA’s final version of the rules:

  • The PRA’s proposed 100% minimum risk weight floor for SME business loans secured on property must be removed – this would be substantially higher than international standards and would mean unsecured SME loans would have lower risk weights than secured loans, which is illogical and creates the incentive for banks to pursue higher risk lending.
  • If the SME Support Factor is to be removed, a transition period to 2030 must be provided so as to avoid a cliff edge effect on the UK economy in the next two years, when the economy is already struggling

Allica believes this approach could achieve the PRA’s over-arching objectives, while also implementing a fully risk-sensitive basis for capital requirements, without materially increasing the capital required which could cause substantial damage to the SME economy.