Are bank capital requirements killing the traditional business overdraft?

Are bank capital requirements killing the traditional business overdraft? Photo:
Written by Conrad Ford

Conrad Ford on the subject of bank capital requirements and SME financing, and how the UK has experienced the effects of Basel III.

Intended to prevent a repeat of the 2008 financial crisis, the Basel III accords set out significantly more onerous capital requirements for banks around the world. While Basel III should indeed improve macroeconomic stability, a common concern has been that higher capital requirements may harm bank lending to small and medium-sized enterprises (SMEs). This is more than an academic point, as finance-hungry SMEs are a vital component of economic growth.

A good example is an OECD report from 2012 called ‘Financing SMEs and Entrepreneurs: An OECD Scoreboard‘, which quoted one academic commentator saying, “It is beyond serious doubt that loans will become more expensive and harder to obtain under Basel III”. A technical particularity means that overdrafts, a crucial working capital lifeline for many SMEs, are particularly badly hit by Basel III, as banks are often forced to hold costly capital against undrawn lines of credit.

Here in the United Kingdom, we recently carried out a survey of SMEs to see whether, five years on, concerns about Basel III are being borne out in reality. The answer, here in the UK at least, is that SME overdrafts are indeed falling at a dramatic rate, with 30% of UK SMEs saying that their bank has reduced or withdrawn their overdraft in the last two years. Worrying figures from the Bank of England show UK business overdrafts falling by almost $10m each working day, which in a recent London newspaper editorial, I likened to “an enormous vacuum sucking vital working capital out of the small business community”.

Some economies may be relatively insulated from collapsing SME overdrafts, for example US firms have historically relied less on bank financing than European counterparts. Equally, the US has been the epicentre for the extraordinary explosion of innovative alternative finance in recent years (covered by a recent Goldman Sachs research report tellingly called ‘The Rise of the New Shadow Bank‘), which may be partly driven by regulatory arbitrage of Basel III’s bank capital requirements.

That said, it’s difficult to imagine that the global economy won’t face significant challenges from the impact of Basel III on SME financing, and it’s hard to see local policymakers standing by if well-intentioned regulations mean that SMEs are starved of vital working capital finance. Here in the UK, the government is experimenting with some quite radical solutions to SME financing, including forcing major banks to share their rejected loan applicants with alternative finance providers, and application programming interfaces (APIs) into bank account data to stimulate better SME finance choice and availability.

I’d be very interested to hear your views on whether our UK experience resonates with you.


About the author

Conrad Ford

Conrad Ford is chief executive of London-based Funding Options, and previously worked in the group strategy team of Barclays. Funding Options recently released a research-based white paper called 'Small business finance: Life after the business overdraft'.


  • So true Conrad. Nearly all the companies we talk to have seen overdrafts reducing as Banks are forced by Basel III to change their models. From ArchOver’s point of view its a good thing as it drives bank customers to more expensive products like invoice financing and they then jump ship to our cheaper product but its not right for UK SMEs to have to suffer the loss of overdrafts.

  • Basel 3 would have had significantly greater impact 10 years ago, when innovation wasn’t there to offer alternative ideas. I think any short term impact on a company due to overdraft withdrawals would be limited and quickly overturned. Only 16% of SMEs use one now according to a Small Business Finance Monitor report, and it’s dropping quickly.

Leave a Comment