SMEs warned of the dangers of shadow banking

SMEs are being warned about the dangers of shadow banking after a new crackdown on the practice may prevent some small businesses from receiving finance. Experts are concerned that the new legislation may hurt more than it helps.

Shadow banking refers to financial institutions that act and resemble banks, but actually are not required to follow the same regulations as formal banks. The FSB (Financial Stability Board) issued recommendations this month against shadow banking practices in order to prevent them from once again playing a role in the financial crisis as an unregulated financial institution.

Former chairman of the England Institute of Chartered Accountants, Eric Anstee, warned that too much intervention from regulators will actually slow down or potentially halt the flow of funding to SMEs that already have problems accessing bank financing. This is because it will affect trade and asset finance providers that often serve important roles for SMEs in the ‘peer-to-peer’ online market.

Anstee, who is the leader right now of the City of London Group investment firm stated that they are all aware that a regulatory framework needs to be created that will help to strengthen the financial system, but not at the cost of SMEs access to finance.

He went on to explain that lending to SMEs over the past year has fallen by almost £14bn and a report backed by the major banks this week reported that many SMEs have all but given up on traditional lenders and their practices. Therefore, he believes that alternatives forms of financing need to be nurtured and cared for via supportive policies and not overly restrictive policies.