Will new bank reforms boost SME lending?

In recent weeks, there has been an overriding concern over what the Independent Commission on Banking would recommend in its report about the state of banks. Would it be hard-hitting enough? Would it strangle the economy too much... or is regulation a good thing?

The ICB’s report has today been released, with the headline news being the recommendation that banks need to ring fence retail banking away from high-risk investment banking.

With reforms to banks not occurring that often, the eagerly-awaited report has already seen arguments and counter-arguments from a variety of experts in different sectors on whether it will be good or bad for the UK’s economy.

On today's SBF blog, we takes a look at how experts feel these developments will potentially impact on SME lending.

SMEs to benefit from more finance available?

Some sources certainly do believe that the reforms that are set to occur will encourage banks to lend more money to SMEs, without any need to raise fees.

The Discourage Economy report called last week for the economic recovery to be driven more and more by the impressive progress in technological and scientific research that UK researchers are making.

With ring-fencing, the report claims that the incentive structures would change and be more highly-geared towards lending to innovative and creative SMEs. It also went on to indicate that bank fees would see, at best, ‘trivial’ rises.

Will Hutton, author of the report, summarised its findings, “Requiring banks to carry increased capital while in addition requiring separation or as a second best, tough ring-fencing between investment and retail banking, will not only help de-risk the UK financial system but stimulate lending to high growth innovative SMEs."

Fees to rise as overseas competitors put at advantage?

The proposals for UK banks are ‘out of step’ with measures agreed on an international scale, according to the Confederation of British Industry.

The CBI’s report claims that UK businesses will then be at a disadvantage to overseas competitors due to the proposed reforms, which will then increase the cost of lending.

"The UK is going it alone on ring-fencing, so the government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth," said the CBI deputy director-general Neil Bentley.

The Unite union were also less convinced by the news, as they felt it was not enough just to create a firewall and was a ‘weak gesture’.