Some of the press headlines following the PRA announcement of Basel 3.1 near-final rules suggest that the changes are benign and straightforward, with largely unchanged capital requirements. If only life were that simple!
Specifically thinking about the asset finance market, it was announced that for standardised banks, the feared removal of the SME Support Factor – resulting in increased Pillar 1 minimum regulatory capital from 57.14% to 75% - will be implemented, but that this will be counterbalanced by an "SME Lending Adjustment" under Pillar 2A.
However, this adjustment will be firm-specific, so the extent of that counterbalancing will vary between banks. As each bank will be affected differently, this will presumably drive a shift in the relative attractiveness of SME lending across the market, may or may not lead to an increase in capital requirements, and could still result in changes to competitive positioning or how each bank prioritises asset finance compared to other uses of its capital.
Recapitalisation of existing books may bring this into stark contrast, especially where portfolio profitability is negatively impacted. This could drive divestment or the use of capital relief structures, such as trade credit insurance where risk is transferred to a highly rated insurer to reduce risk-weighted assets. For example, transferring SME risk to an AA-rated insurer would represent a 20% RWA, which could make a material difference for a capital-constrained SME lender, in any circumstances.
Details relating to the SME Lending Adjustment have not yet been released, increasing the uncertainty for capital managers. A number of other Basel 3.1 matters have been adjusted in the near-final rules announcement, and the level of complexity during the implementation period is inevitably high. The timescale for implementation has been extended by the PRA to 1st January 2026 but remains short (in fact, much of the extension is eaten up by the delay in near-final rules which were due to be released in Q2). Time is of the essence, and some banks will be forced into difficult decisions.
