Regulatory Changes Needed So That Smaller Banks Can Hold Their Own Against The Giants

Partner at Gambit Corporate Finance Frank Holmes and Alex Griffiths, an undergraduate at the School of Management of Cardiff Metropolitan University, on why smaller lenders need a level playing field in providing finance to SMEs.

Many SME's feel that large high-street banks are unwilling to lend to them.

This is the persistent gripe of many owner-managed companies despite government intervention.

The reality is that bank lending to businesses is falling. For eight consecutive months lending has decreased, and is now at the lowest it has been for three years.

The big banks are preoccupied with their large portfolios, toxic debt and satisfying regulatory capital reserves requirements.

These priorities deflect attention and probably kill an appetite for new lending to SMEs.

The lack of advances from high-street banks, however, has opened up the market, prompting asset finance specialists and smaller investment funds turned banks, to up their game.

These smaller firms operate under bank licenses and due to the shift in bank sentiment are able to implement strict lending criteria; which has not stopped the borrowers coming forward.

In the UK, there are 234 banks excluding building societies and overseas banks. The irony is that it is the large banks that have stopped lending to SMEs, instead choosing to lend to smaller banks and asset finance firms, so that they can lend to the SMEs the large banks did not want to engage with.

Smaller banks such as Aldermore and Close Brothers specialise in providing asset finance for hire purchase and leasing, as well as invoice finance allowing SMEs to unlock capital when fast access to funds is needed.

The Business Finance Partnership programme aims to increase the supply of capital through these other channels, such as asset-finance, invoice discounting, trade finance and other diverse types of funding. Ultimately, it intends to invest £1.2bn through these alternate channels matched by at least equal private sector capital. So far, the UK Government has invested £600m alongside £650m private sector capital, in order to stimulate growth and expansion of SMEs, which comprises 4.8m businesses, employing 21m people with combined sales exceeding £3,000bn.

At the same time, the small banks are building up their customer services teams of redundant staff from high street banks, trading on good service and keen to remind them of the treatment they may have experienced.

However, the prevailing regulations are such that the smaller banks are unable to compete on an even playing field. Large banks use different methods to calculate their capital requirements while the small players face a more rigorous method which means reserve requirements are significantly higher.

With more than 200 institutions out there, there is a diminishing requirement for more SME funding services, but there is an immediate requirement for regulatory change to enable the smaller local players to compete on even terms with the seemingly uninterested premier banking division.

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