The Bank of England’s Prudential Regulation Authority (PRA) has today announced a package of proposals as part of the Basel 3.1 implementation process. 

The SME Supporting Factor, which allowed banks to hold a lower rate of capital to counterbalance loans to small and medium-sized enterprises, is to be removed, but the PRA will in its place introduce a new SME lending adjustment which it believes will have a comparable effect in terms of supporting lending to SMEs.

Responding to the announcement, Martin McTague, National Chair of the Federation of Small Businesses (FSB), said:  “Small firms will greet the PRA’s announcement with cautious optimism, and will very much hope that the PRA’s assertion that lending to SMEs will not suffer as a result of the changes turns out to be the case.

“It is clear that the PRA has listened to FSB and to others on the importance of SME lending for growth, and the risk to lending levels to small firms if the SME Supporting Factor were to be done away with. While the factor has not been retained, the PRA says it is confident that other changes to the package will avoid an increase in capital requirements for SME lending.

“The PRA has gone to significant effort to account for the importance of small business lending – the overwhelming imperative is that the PRA will change course if, on close examination, they have got this wrong.

“The loss of the SME Supporting Factor with nothing to replace it would have meant many future lending decisions going against small firms with the greatest potential to grow and develop, cutting them off from the funds they need to expand and drive the growth we as a country need to see, so we are glad that this argument has cut through at the PRA.

“There’s much more that can and should be done to improve small businesses’ access to finance, especially reducing the disproportionate harm of current practice in relation to personal guarantees, which has a chilling effect on entrepreneurs’ willingness to invest and take risk.”