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Relaxed Banking Rules – Boost for SME Lending?

With bank lending to SMEs coming in for a lot of criticism recently, there has finally been some good news which might see more lending being awarded to the country’s small businesses. Last week lending regulations for the UK’s major banks have been loosened in a bid to make sure banks are lending properly to SMEs and households alike.

The Financial Services Authority has confirmed that now banks won’t need to hold 10% of their total lending capital - instead, they will just need to hold a fixed amount that will not change as lending grows. They will also not need t hold any capital at all against new loans made through the Funding for Lending scheme that was recently launched by the Treasury and the Bank of England.

This requirement for banks to hold a percentage of their lending capital was intended to act as a buffer against market shocks. Though this seems like a logical response to ongoing economic strife, it has limited the amount that banks have been willing to lend in recent times. Relaxing this legislation will hopefully bring about better credit availability, which in itself will hopefully aid better recovery within the UK economy.

This comes as part of a global strategy that is looking to use bank regulation as an economic tool – there are expected to be benefits for SMEs and householders, but there may be a negative impact on savers by causing a further reduction in already low interest rates. There’s also the risk that it may set a precedent that challenges the credibility of the FSA – will the relaxation be permanent, or  will regulation be tightened again if the economy started to recover?

 

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