A crackdown on “shadow banking” could make it even harder for small businesses to raise finance, experts have warned.
The global Financial Stability Board (FSB) has this month issued recommendations to prevent a repeat of the role unregulated financial institutions played in the financial crisis.
Eric Anstee, a former chairman of the Institute of Chartered Accountants in England and Wales, has warned that “excessive intervention” from regulators would further “stifle the flow of funding” to small companies that already complain about access to bank finance.
Shadow banking describes financial institutions that act like banks but exist outside the constraints of bank regulation. In SME finance, it includes trade and asset finance providers as well as innovative platforms such as “peer-to-peer” online lending markets.
Mr Anstee, who leads investment firm City of London Group, said: “We are all acutely aware of the need for a prudent and robust regulatory framework that strengthens our financial system.
“However, excessive intervention could have the detrimental effect of stifling the flow of funding from what the FSB [calls] 'other financial institutions’, which SMEs so desperately require.”
Over the past year net lending to businesses has fallen by £13.5bn, while a bank-funded report this week acknowledged that small firms were beginning to 'turn their backs on’ traditional lenders.
Mr Anstee warned of the risk of a “huge financing gap that will constrain growth in the UK economy for years to come” if non-bank lenders were not encouraged.
“To focus purely on enforcing greater regulatory requirements on non-bank lending fails to grasp the importance of this sector’s key role in helping the SME sector fuel economic growth, particularly in specialist areas such as trade finance.”
Chris Cummings, chief executive of TheCityUK, a financial services industry body, said: “Shadow banking does require appropriate regulation and monitoring but [discouraging it] could jeopardise the emergence of alternatives like peer-to-peer lending platforms.”
He also warned that small firms would bear the brunt of regulation forcing banks to meet tougher capital and liquidity requirements, which would “prolong the economic slowdown”.
“The UK’s recovery will to a large extent depend on its SMEs leading a return to growth. This in turn depends on their ability to receive stable and sustainable funding for business investment. Our report shows that when capital requirements are increased in a recessionary period, banks that cannot raise fresh capital repair capital ratios by reducing their balance sheets and cutting new lending.”
The group said alternative forms of finance like peer-to-peer lending should be nurtured through supportive policies but warned they “will need at least 10 years to mature to build alternative finance to a level where it becomes a real complement to bank lending”.
The Bank of England's network of regional agents last week found more evidence of banks moving away from unsecured lending to small businesses. They warned that “the availability of overdrafts was said to be continuing to reduce" over the last month "with banks preferring asset-backed lending and seeking additional personal guarantees".