The Bank of England has published a staff working paper examining how risk-based capital requirements affect competition, pricing and credit allocation in the UK unsecured small and medium-sized enterprise lending market. Using confidential loan-level data and a structural model with asymmetric information and imperfect competition, the paper finds that regulation interacts with differences in lenders' screening technology and cost structures to shape market outcomes, rather than explaining bank and non-bank market shares on its own. The research finds that non-bank lenders serve riskier borrowers and account for a much larger share of larger unsecured loans, while banks concentrate more on smaller loans and show lower realized default rates. Estimated results suggest banks benefit from lower funding costs but face capital-related balance sheet costs, while non-banks face higher marginal funding costs but appear to have more precise screening technology. The paper also finds that lenders price risk using information not captured by observable borrower characteristics, and it presents a quantitative framework for assessing regulatory policy in markets where regulated banks compete with non-regulated intermediaries.
Bank of England2026-06-19
Bank of England publishes working paper on how capital requirements shape UK SME lending competition between banks and non-banks
The Bank of England has published a staff working paper on competition in UK unsecured SME lending between banks and non-banks. It finds that risk-based capital requirements, combined with differences in screening capability and funding costs, shape pricing and credit allocation. Non-banks appear to serve riskier borrowers and larger loans, while banks benefit from lower funding costs but face capital-related constraints.