The Prudential Regulatory Authority (PRA) is facing calls to consider changes to proposed new bank capital rules.

Allica Bank suggested that the changes could ensure small businesses have access to finance, as well as allow the UK’s SME challenger bank sector to “continue to thrive”.

In November last year, the PRA published a consultation paper outlining its proposed approach to implementing the final elements of the Basel international banking standards, known as Basel 3.1. This consultation contains proposals to materially increase the level of risk-weighting banks would need to apply to SME lending.

Based on new research by economic and finance consultancy Oxera, commissioned by Allica, the PRA’s current proposals could put up to £44bn of SME lending “at risk”, if a more risk-based and proportionate approach to new SME lending capital rules is not implemented.

This comes as research published in February by the British Business Bank showed that challenger and specialist banks accounted for 55% of gross lending to small firms in 2022 – a record share compared to the traditional big five banks in the UK. Allica suggested this demonstrates the “vital role” that challenger banks now play in providing finance to SMEs.

The UK’s estimated 5.5 million small businesses make up more than half of private sector employment, half of GDP, and have created double the number of jobs compared to large companies.

CEO of Allica Bank, Richard Davies, commented: “Over the past decade, the PRA has been instrumental in helping establish a more diverse and competitive banking market – and non-systemic challenger banks now account for more than half of all new lending to small firms across the economy.

“This transformational change in the UK banking market has helped to create a more robust, diverse and responsible SME finance market for Britain’s army of small business owners, the engine room of our economy.”

Allica has proposed that a more risk-sensitive capital regime should be implemented than the PRA is currently proposing, including removing the PRA’s proposed 100% minimum risk weight floor for SME business loans secured on property. The challenger bank believes this would be substantially higher than international standards and would mean unsecured SME loans would have lower risk weights than secured loans, potentially incentivising banks to favour riskier lending.


The bank also wants the PRA to introduce a new risk weight for equipment and invoice finance lending to SMEs at 69%, and wants to put unsecured SME lending in line with the current proposals, applying 75% risk weights for smaller loans and 85% risk weights for larger loans to SMEs.

Allica believes this approach could achieve the PRA’s over-arching objectives, while also implementing a fully risk-sensitive basis for capital requirements, without materially increasing the capital required which could cause substantial damage to the SME economy.

“With a more risk-based approach to new capital rules, aligning the PRA’s proposals to the actual risks associated with lending, the regulator could avoid a really negative impact on the SME economy in the next two to three years,” Davies added.

“It’s really a golden opportunity to continue to cement the gains made in increased competition in the SME banking market while meeting the PRA’s prudential objectives.”

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