• Regulators should analyze costs and benefits of measures
  • `Full picture' of regulatory initiatives must be considered

Europe should fight to retain the looser capital rules on corporate loans in a global review of regulation of how banks account for credit risks, European Central Bank Governing Council member Ewald Nowotny said.

Companies in Europe depend overwhelmingly on bank loans and capital markets aren’t developed enough to replace that funding channel quickly, especially for small and medium-sized companies, Nowotny, the 71 year-old governor of the Austrian central bank, said in an interview in Vienna yesterday. Hence the continent is sensitive to changes in rules for corporate lending, he said.

At present, loans to smaller companies receive preferential capital treatment, “and there’s a discussion not to prolong this,” he said. Borrowing “could become harder for SMEs. I think it would be very dangerous.”

The Basel Committee for Banking Supervision is overhauling Basel II, a system prescribing how much capital banks must set aside for loans and dating from 2004, after the financial crisis laid bare its shortfalls. Risk weights for company loans rise significantly in some categories under a proposal Basel presented in December.

Under Basel II, risk weights are set in a range of 20 percent to 150 percent of a loan’s face value, depending on factors including the size of the company and its credit rating. Under the new proposals, risk weights range from 60 percent to 130 percent of the value. The definition of companies small enough to benefit from the same rules as retail borrowers may also be tightened.

The revised Basel framework “has a sort of bias against bank lending,” Nowotny said. “But we do not have the capital markets in Europe to the extent that we would need. So we have to be very careful not to have regulatory moves that would have a negative impact on the real economy.”

Banking regulators should analyze the combined effect on the real economy of the multitude of rules that are due to come into force, Nowotny said.

“It’s very important that we have a discussion where the full picture can be discussed,” he said. “You really have to look at costs and benefits.”

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