Finance · 4 January 2016

Banks urge government to fight Basel capital rules

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Proposed capital rules have the potential to force banks to curtail lending to small businesses, including small construction firms.

The UK’s smaller banks have this week encouraged the government to battle against newly proposed European capital rules that could force the issuance of emergency rights that might curtail lending to small businesses, particularly in the construction sector.

Following suggestions from the Basel Committee on Banking Supervision, the amount of capital small banks should be required to hold against other parts of the business, including lending to land owners and house-builders, should increase significantly.

Worries have emerged that such measures could negatively impact the UK more than other European countries – the housing sector seen to have a greater impact on the overall health of the UK’s domestic economy than it does in other countries.

The proposed capital rules could limit the money available to SME construction firms, directly effecting the sector’s capacity to build new homes.

Duncan Montgomery, a partner at law firm Whittingham Riddell, said of the proposals: “Borrowing costs for every UK trader of moderate size will start to rise. This could have wide ramifications for business structures, and may affect many well-run businesses.”

“It should have suitable exemptions for certain types of landlord and business,” he added. “Small construction companies need funds to trade at maximum potential. Very few are cash rich and this measure directly hits their ability to build the houses we need as a country.”

According to the Department for Business, Innovation & Skills (BIS) around a fifth of all UK SMEs operate in the construction industry, with 96 per cent of all UK building firms being micro businesses.

The news comes the day the government reveals plans to commission small firms to build over 10,000 new homes on publicly owned land. It is hoped the policy will reduce the dominance of large construction companies and increase the level of affordable housing in the UK.

Montgomery added: “We have a very different landlord market from, say, Germany, and today’s announcements on local government land going to small house builders seeks to stimulate a sector of the economy that this kind of measure will directly hit.”

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ABOUT THE EXPERT

Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

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