End of SME business banking as we know it

Currently, banks are required to allocated 4 times more of their own shareholders' capital against Small Business Loans than required for residential mortgages.

As bank management teams focus on maximising Return on Equity (RoE), this makes it hard for banks to justify lending to small businesses. However, it's acceptable as long as they receive more in the way of cheap deposits from other small businesses.

Now the regulators are discussing increasing the amount of capital that banks must set aside against Small Business Loans - it could be 5 times more than the current requirement (300% risk weighting versus about 60% currently). This looks like the end of Small Business Banking as we know it.

basel 4
basel 4

These proposals would apply to smaller banks that are required to apply the Standardised Approach. We await the proposals for major banks but expect a similar approach.