Ease lending rules for small businesses, Bank of England calls

Andrew Haldane, executive director of financial stability at the Bank of England, has called for a relaxation of rules that tighten lending to small businesses while the UK economy is in dire need.

Small businesses are on the decline, with lending reportedly shrinking by 10% each year. Banks are suggesting that there is a lack of demand, while businesses are reporting that loan rates are too expensive.

Mr Haldane suggested that credit providers need to recalibrate their assessment of risk and return, away from the collateral required by a bank and towards the economic benefits that small businesses could provide. “At present, they are calibrated to the risk [posed] to a bank. In future, they need to reflect returns to society”, he noted.

Banks and regulators are currently arguing over this impasse. Banks need to meet legal demands to hold more capital, and are seeking to either reduce their loan books, or remain stringent about business lending criteria. Regulators are challenging banks to soften their business loan risk assessments in light of the economic downturn to keep credit and loans affordable for businesses.

Mr Haldane suggested that regulators should consider allowing banks to use capital buffer to keep a supply of credit for important economic stimulus.

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Kate Guthrie