Despite the failure of mid-tier Silicon Valley Bank in the US, smaller banks deserve regulation that is commensurate with their size and systemic importance to the wider banking sector, says Christopher Papadopoullos, analyst with the GlobalData Thematic Research team 

The UK should continue to push through plans to create a lighter regulatory framework for smaller banks, regardless of the recent failure of Silicon Valley Bank.

Senior officials at the Bank of England, including its governor Andrew Bailey, have long questioned the need to apply Basel III, a set of bank regulations implemented over the 2010s, to smaller, domestically-focused banks. Basel rules were originally designed for larger, cross-border banks with retail and investment banking operations, which make it more costly for banks to lend to businesses, especially small- and medium-sized enterprises (SMEs).

Strong and simple 

Britain’s departure from the EU gave it regulatory freedom to look again at whether smaller banks could be freed from some of the more onerous parts of Basel III. It started a discussion around a new framework called ‘Strong and Simple’. 

Still in the consultation phase, ‘Strong and Simple’ could ease compliance requirements and potentially set easier capital and liquidity requirements for banks judged to be of lesser systemic importance.

The economic impact of this would be highly positive. Basel III hit SME lending and economic growth Throughout the 2010s, growth in bank lending to SMEs was either contracting or stagnant, according to Bank of England figures. 

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Meanwhile, the Department for Business, Energy, and Industrial Strategy estimates that SMEs employ 61% of the nation’s workers and account for 52% of its total business turnover. 

Basel III has prevented a large slice of Britain’s economy from properly accessing a key source of finance. In the US, smaller banks were subject to a less strict regulatory framework, and lending growth in the US continued at a higher rate. 

This may be one reason why the UK and European economies experienced a lost decade of economic growth over the 2010s, while the US continued to grow much as it did over the 2000s. Australia, Canada, and Switzerland also applied a simpler regulatory regime to smaller banks.

SME funding gap

The SME funding gap created by Basel III has been partly filled by venture capital and private equity, but the problem with equity financing is that it is difficult to scale. Each individual investment must be painstakingly scrutinised and analysed, whereas providing small businesses with overdrafts and loans generally requires far less due diligence and can be provided to a much greater number of businesses. 

Would deregulation come at a cost of less stability? Not necessarily. The rescue of Swiss banking giant Credit Suisse by its rival UBS shows that even banks subject to stringent forms of regulation are not immune from failure. As detailed and rigorous as a rulebook may be, there is ultimately little protection against bank leadership teams making poor long-term business decisions.

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