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Tuesday, April 23, 2019

Opinion > OakNorth

Our response to the Treasury committee's SME finance inquiry

Joel Perlman, CSO at OakNorth | 14:57 Friday 15th June 2018

Earlier this year, the Treasury committee launched an inquiry into SME finance looking at a number of issues.

This included competition in the market, the types of funding available to small businesses (both debt and equity) and whether the current regulatory framework provides SMEs with enough protection when it comes to borrowing. 

On 23rd May, we were invited into parliament to provide oral evidence to the committee. Here is a summary of our views.

Brexit creates an opportunity to reform regulation and create more proportionality between challenger banks and incumbents

Currently, the European Banking Authority mandates that national regulators in EU member states must impose the Basel standards in full on all banks, regardless of size or whether they pose a systemic risk or not. This means that new banks like us have to adhere to more onerous capital requirements and hold up to 10 times more capital than larger banks to write the same loan. We have to use a standardised approach to our risk weighting, compared to the internal risk-based model that larger banks get to use. By being able to apply our own model regarding risk weighting instead of having to use the standardised approach, we would have a larger amount of capital at our disposal which would ultimately mean more money that we can lend. This would be good news for SME lending competition and good news for borrowers.

Greater support is needed to inform scale-up businesses of the options available to them when it comes to borrowing

The British Business Bank has done excellent work to help address this and support SMEs with high-growth potential through schemes such as Help to Grow and the ENABLE Guarantee programme. However, there is still a lack of awareness with only 37% stating that they have a full understanding of bank loans. Furthermore, confidence among SMEs planning to apply for bank finance has declined, falling from an abysmal 55% in Q4 2016 to 43% in Q4 2017. This lack of confidence stems from the fact that many businesses which would like to borrow from a bank, don’t end up applying as they either feel they would be turned down, or feel the bank is reluctant to lend. 

SMEs need to be able to compare lenders against several factors, not just price

Following its retail banking investigation which concluded in 2016, the Competition and Markets Authority recommended that a price comparison website be created to help SMEs compare different providers when it comes to loans of up to £50,000. While we agree that a comparison website would be helpful for increasing SMEs’ awareness of other providers and enabling them to find the best lender for their needs, we disagree that it should focus on price, or that it should be limited to loans of up to £50,000. A comparison website should enable SMEs to compare a multitude of factors including price, such as speed of response, customer service, average transaction times, whether the bank offers term and revolving credit facilities, and what collateral the lender is willing to consider as security (real estate, stock, debtors, plant and machinery, alternative assets, intellectual property etc).


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