Source · Select Committees · Treasury Committee
Recommendation 2
2
Acknowledged
Paragraph: 25
Removal of Basel 3.1 SME supporting factor threatens UK SME finance market
Conclusion
The removal of the SME supporting factor under Basel 3.1 threatens to undermine the UK’s SME finance market by increasing capital requirements on lenders to SMEs. This will drive up the cost of finance for SMEs and may restrict the supply of lending as banks shift their loans away from the market. At a time when costs are tight and acceptance rates for finance low, anything that unnecessarily damages the availability of finance to SMEs is unacceptable. Other jurisdictions like the United States and European Union are also not pursuing as strict an interpretation of Basel with regards to SME lending so removal of the SME support factor risks putting the UK out of step with international peers and competitors, with negative consequences for the competitiveness of the UK market.
Government response summary AI-generated
The government acknowledged the Committee’s concerns regarding the removal of the SME supporting factor under Basel 3.1 but made no specific commitments to action.
Summary of the government's response below — read the verbatim text to verify.
Paragraph Reference:
25
Government Response
Acknowledged
HM Government · verbatim extract
Acknowledged
The PRA must ensure that the final implementation of the Basel 3.1 standards leaves capital requirements on SME lending no more stringent than they are under the current system and that international competitiveness with the EU and the US is not harmed. ( Paragraph 26) 3. We acknowledge the Committee’s concerns regarding the removal of the SME supporting factor under Basel 3.1. 4. The Government notes since the publication of the SME Finance report, the Prudential Regulation Authority (PRA) has sought to make adjustments in this area. In September 2024, the PRA published its second policy statement, detailing requirements for firms’ lending activities. The PRA also announced a six-month delay to the UK’s implementation of Basel 3.1 standards, with the new start date set for January 2026 to align with the EU’s timeline for the trading elements of its package. 5. The Government welcomes the PRA’s Basel 3.1 package and commends its thoughtful consideration of feedback, which has led to well-considered adaptations. This included evaluating the impacts of all aspects of the Basel 3.1 package on growth and competitiveness. Notably, the PRA seeks to ensure that the overall capital requirements for SME and infrastructure lending do not increase. 6. While the PRA is proceeding with its proposal to remove the SME supporting factor to align with international Basel standards, this change will not result in higher capital requirements for lending to small businesses. The PRA has confirmed that it will make structural adjustments to another part of the capital framework to maintain the current capital requirements for SME lending. 7. In September 2024, the Treasury published draft legislation necessary to implement Basel 3.1. By revoking the current capital requirements from the statute book, the Treasury will enable the PRA to implement its Basel 3.1 package effectively. The Treasury will also ensure that firms have the necessary certainty to implement the new requirements before they come into effect in January 2026. 8. The PRA’s Basel 3.1 package is tailored to the UK and aims to address weaknesses exposed during the financial crisis while supporting UK economic growth. We recognise that significant uncertainty remains regarding the US implementation of Basel 3.1. Both The Government and the PRA are alive to changes in the US position. We will continue to monitor this.
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