The impact of the PRA’s proposals for implementing Basel 3.1 standards in the UK
The Prudential Regulation Authority (PRA) is in the process of reviewing risk weights on banks’ assets. Allica Bank commissioned Oxera to review the PRA’s proposals, particularly as they are likely to affect Allica’s, and various other banks’ core activity, SME lending.
SME finance is important for the general health of the UK economy, with SMEs having been described as an ‘engine of growth’. Therefore this report focuses on the potential impact of the PRA’s proposals on SME lending.
SME lending is an area where ‘challenger’ banks have been able to successfully enter and serve a substantial section of this market in spite of the competitive disadvantages challenger banks face vis-à-vis larger high-street banks. As such, the banks that now provide a majority of SME loans are too small to be systemically important. At the same time, it is clear that SMEs remain reliant on bank finance, lacking the access to wholesale debt markets enjoyed by larger firms. As a result, it seems likely that an aggregate cost benefit analysis of the proposed tightening of prudential regulation will have underestimated the costs as they affect SME finance (due to an inability to substitute for other forms of finance) and overestimated the benefits of tighter prudential regulation in respect of SME finance (as many of the banks engaged in SME lending are too small to be systemically important).