Financing SMEs is critical for the economy to function. Without liquidity the economy would begin to stutter and stall.
Despite this, the Bank of England has been considering rules which would hold back normal bank lending to small and medium size businesses.
Under proposals, known as Basel III, lending to SMEs would be seen to be inherently risky for banks. In an effort to avoid a repetition of the bank runs in 2008 and 2009, the central bank is urging lenders to be cautious when lending to small firms in order to protect bank balance sheets.
This approach, though, has led to concerns that if this policy was followed through, great businesses could be shut off from funds and this could severely hit jobs and bottom lines.
The London Chamber of Commerce and Industry facilitates policy dialogue amongst all chambers of commerce across the country on financial and professional services. This work led the British Chambers of Commerce (BCC) to urge the Bank of England to think again.
In its submission to Threadneedle Street, the BCC stated:
"We note, with disappointment, the proposed removal of the SME Supporting Factor, which risks damaging the growth prospects of UK businesses, 99% of whom are SMEs.This, in turn, could threaten the UK’s ability to remain competitive on the world stage.
"In the wider context, it should be recognised that lending to SMEs remains below pre-pandemic levels, compared to lending to larger companies which has recovered to pre-pandemic levels.
"Whilst this is in part due to the artificially inflated lending levels seen during the pandemic due to government-funded support schemes, an increasingly restrictive lending environment, caused by the removal of the SME Supporting Factor is likely to exacerbate the problem.
"The decision to remove the SME Supporting Factor will have a very real impact on SMEs across the UK, making credit both less accessible and more expensive for the vast majority of businesses.
"Making the decision during the current period of high interest rates and difficulties in some parts of the business banking sector seems counterintuitive, given that SMEs are the types of businesses that are most likely to find it difficult to access finance. This is further highlighted by the fact that the SME Supporting Factor was introduced following the 2008 financial crisis, a time of arguably similar financial magnitude, to alleviate pressure of stricter financial requirements on SMEs.
"It is worth noting that whilst limiting risk to the UK economy is welcome, it is not the case that lending to SMEs is inherently risky, nor that SMEs have a disproportionately high rate of default on loans. The supporting factor has underpinned a thriving challenger bank sector in the UK and to lose or limit that now seems deeply irresponsible."
The Bank of England has responded to the chambers by putting this policy on pause.
We welcome this decision. Any move that could further tip the economy into a downward spiral must be avoided at all costs.
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