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April 11, 2019

Banks consider wholesale business lending due to concerns over defaults

Banks are shifting towards less-risky wholesale business lending, with a 48% jump in lending to leasing providers in just the last year.

By Christopher Marchant

Banks are shifting towards less-risky wholesale business lending, with a 48% jump in lending to leasing providers in just the last year, according to data from the Bank of England (BoE).

Data from the BoE shows that lending to leasing providers increased from £32.7bn in December 2017 to £48.5bn in December 2018.

Debt advisory firm Hadrian’s Wall Capital believes that some banks are becoming increasingly worried about the possibility of rising defaults in their loan books, which has led them to shift their exposures to wholesale finance by lending to larger leasing businesses.

The risk in bank loan books has already been under scrutiny in recent months: in January Metro Bank said that it had under-reported the risk of some of its commercial property lending.

Marc Bajer, chief executive officer of Hadrian’s Wall Capital, said: “There are rising concerns among some banks about the regulatory risk in their loan books. Increasing wholesale financing to leasing providers is an effective way for banks to quickly shift that risk.

“For banks looking to reduce regulatory risk, lending to leasing companies can make a lot of sense. It allows them to indirectly finance small businesses through the leasing companies and benefit from the returns associated with it, but without having to take the risk of having tens of thousands of SME borrowers directly on their books.”

Bank capital requirements are driven by extensive regulation and they hold more regulatory capital on their balance sheets if they write loans to small companies compared with many other loans, such as mortgages or highly rated companies. The regulatory capital provides a layer of protection if the bank experiences losses. Small business and property development lending is among the higher capital intensive forms of lending under their current regulatory risk weighting.

An investigation by debt adviser Hadrian’s Wall Capital (HWC) showed that over half of the UK saw bank lending to SMEs fall in 2018.

74 out of 132 postal areas of the country saw falls in the value of outstanding bank loans to SMEs over the last year, which follows on from the fall in SME bank lending in 2017.

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