New bank capital rules proposed by the Prudential Regulation Authority (PRA) could put up to £44 billion of SME lending at risk, warns new research commissioned by Allica Bank.

In November, the regulator published a consultation paper calling for a significant increase to the level of risk-weighting banks would need to apply to SME lending as part of the roll out of the Basel international banking standards.

The challenger bank has urged the PRA to consider changes to the proposed rules to make sure small business have access to finance.

The research, carried out by economic and finance consultancy Oxera on behalf of the bank, suggests that billions of pounds could be at risk if unless a more risk-based and proportionate approach to new SME lending capital rules are not implemented.

The analysis suggests that the risk weighting for secured SME lending would be higher than for unsecured lending to SMEs, which Allica Bank warned is “illogical and incentivises riskier lending”.

Allica Bank also said that challenger banks using a the PRA’s suggested “standardised approach” to measure capital requirements would see an uptick of more than 30 per cent in the risk weighting that must be assigned to loans made to SMEs.

This would represent a significant impact to the SME lending market, given that earlier this month a study by the British Business Bank found that challenger banks have outpaced traditional banks when it comes to business loans. The report found that over £35 billion of the total £65 million lent to SMEs in the UK – or 55 per cent – came from challenger banks.

"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," said the bank.

Chief executive of Allica Bank Richard Davies said that with a more risk-based approach to new capital rules, aligning the PRA’s proposals to the "actual risks" associated with lending, the regulator could avoid a "really negative impact on the SME economy in the next two to three years".

“It’s really a golden opportunity to continue to cement the gains made in increased competition in the SME banking market while meeting the PRA’s prudential objectives," he added.

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