- SME discount will have `even larger impact' when rates rise
- Uncertainty about future of preference rule hampers lending
Banks pressed European Union regulators to preserve preferential capital treatment for loans to small businesses, as the 28-nation bloc’s politicians try to boost SME financing and kick-start growth.
The EU needs to retain a “supporting factor” in EU bank-capital rules for loans to small and medium-sized companies that recognizes their limited alternatives to bank financing, industry groups from across the bloc said in their responses to a European Commission consultation that ended on Oct. 7.
The capital discount “is very important for the financing of SMEs,” the European Banking Federation said. “The factor should therefore apply after 2016. With rising interest rates and, at some point, rising risks in the SME sector, the factor will have an even larger impact than today.”
Under EU law, capital requirements for credit risk on SME exposures are “multiplied by the factor 0.7619,” and banks should use this relief “for the exclusive purpose” of lending to small businesses. The commission, the EU’s executive arm, must report on the impact of capital requirements on SME lending by January 2017, and propose legislative changes if needed.
The Brussels-based commission is assessing the collective impact of more than 40 pieces of regulation adopted in the wake of the financial crisis, as it turns its attention to job-creation and reviving the economy. Jonathan Hill, the EU’s financial-services chief, last month unveiled his capital markets union plan, an attempt to boost funding to companies and remove barriers to investment within the EU.
In a separate consultation, the European Banking Authority said SME lending suffered a significant drop after the financial crisis to about 54 billion euros ($61 billion) in 2013-2014 from 95 billion euros in mid-2008.
“Although the flow of new bank lending to SMEs has been positive in the post-crisis environment, it remained below its pre-crisis level,” the EBA said. “Bank lending to larger corporates, on the other hand, after experiencing stronger increase and decrease episodes since 2003, already recovered to its 2003-2004 pre-crisis volumes.”
While preferential treatment has been helpful in backing SME lending, the lack of clarity over whether it will be retained has diminished its impact and some firms don’t use it in their capital planning decisions, the Association of Danish Mortgage Banks said in its response. “Extensive requirements for documentation of SMEs in the form of customer data” may also limit its effectiveness, the group said.
The BBA, the U.K.’s banking lobby, said the supporting factor is “slightly effective,” and criticized the quality of the data underlying the consultation. The 18 months since implementation of the regulation aren’t enough to properly assess its impact, and the data are mainly from larger euro-area banks, it said, calling for the study to be revised and expanded to garner more evidence.
Evidence from U.K. banks showed that three of the top five lenders to smaller companies were “challenger banks,” new entrants competing with the major clearing banks, indicating that the supporting factor is an effective provision in supporting such lending, the BBA said.
Swedish regulators said the main issue in lending to small companies is their ability to repay it, adding that lending decisions are typically taken before the supporting factor discount is taken into account. The capital discount may be factored into the price of the loan, they said.
“As such, it mainly acts to reduce the pricing of loans which would have been extended regardless of the discount,” they said. “However, it does not appear to widen the population of firms who can access bank funding.”