Tony Ward is president and CEO of Clayton Euro Risk
It was with little surprise that I read in the press this week that the British Bankers’ Association has warned that lending to small and medium-sized companies will be hit hard by rules put forward by the international regulator Basel Committee on Banking Supervision.
Basel’s demand for a 300% risk weight (previously 75%) to be applied to small business does indeed seem ‘unduly penal’.
This will radically alter how much capital banks need to hold and could be as much as triple the amount that banks must put against a loan. Furthermore, banks will no longer be allowed to rely on external ratings agencies who take into account a wider range of factors when assessing the robustness of a company.
This seems wrong.
SMEs would not be the only sector to be hit.
The BBA goes on to point out that the government’s Help to Buy programme could be ‘neutered’ if the rules came into effect in their present form.
This is because: “Lending rates will need to be reconsidered to reflect the increased capital requirement, which could add to the cost of providing a mortgage.”
With the housing market now firmly back on its feet, this could indeed have a worryingly dampening effect on house prices, future lending and competitive rates.
However for me, the most negative effect of the proposed rulings could be the repercussions on challenger banks who, as the BBA noted, could suffer particularly seriously.
A BBA spokesman said: “It is quite conceivable that some categories of business would become uneconomic for banks, and in our view, barriers to entry will be raised for new entrant challenger banks.”
This is not good.
While I support the need for safer risk calculations for banks, it should not stave off future competition.
For the sake of consumer choice and a happy, healthy UK banking market, there is a need for challenger banks to exist and to sit alongside existing financial institutions.
There is a delicate balance under way with elections just down the road helping to unsettle things.
The timing was therefore unhelpful and in my view these risk reforms cry out for further debate.