Banks blame FSA for choking off credit to small businesses

BANKS are stepping up their efforts to convince ministers that the FSA’s approach to regulation could permanently damage the UK economy.

In a policy paper sent to the Breedon Taskforce, a special government policy unit set up to examine how to expand credit supply to small businesses (SMEs), the banks slam the FSA for choking off a major source of capital. A key issue is the rules governing securitisation – the bundling and selling of SME debt to investors who would not buy single loans because they are too small to be liquid enough.

Banks argue that the uncertainty over whether and how they can bundle SME debt together means investors are simply walking away from deals.

But they also claim the FSA is taking too inflexible an approach to letting banks assess the riskiness of their lending to SMEs.

Lenders argue that the government should push the FSA to:

• Speedily resolve what kinds of SME securitisation are allowed.
• Allow banks to classify SMEs that are suppliers to large, established companies as less risky, meaning lenders could hold less capital against such loans and lend to them more cheaply.
• Allow banks to hold less capital against credit facilities that are not in use, such as an overdraft that an SME has arranged but not drawn. This would again make it cheaper to expand capacity, they say.
• Impose less harsh rules for when an SME “default” is triggered, taking into account how much money is past due rather than simply classifying all late repayments as a default.

The FSA declined to comment.