Abstract: We analyse how risk-based capital requirements shape competition and credit allocation in the UK unsecured Small and Medium-sized Enterprises (SME) lending market using confidential loan-level data. Motivated by empirical patterns, we develop and estimate a structural model with screening, asymmetric information, and imperfect competition, in which banks and non-bank lenders differ in regulatory treatment. We estimate lender-specific costs and screening precision, and show how these features jointly account for the observed lender market shares across borrower risk and loan size segments. Our results indicate that regulation interacts with heterogeneity in information processing and costs to shape equilibrium pricing and credit allocation, with non-bank lending reflecting not only regulatory differences but also comparative advantages in screening technology. Our model provides a quantitative framework for evaluating regulatory policy in markets with both regulated and non-regulated intermediaries.
