01 October 2015

EBF draft response to the EBA discussion paper on the SME supporting factor

The EBA assessment paper presumes that the volume of write-offs and bad assets sold are lower in the SME segment as in large corporates. The question is not so much to demonstrate that SME lending has increased thanks to the SF, but to figure out how much SME lending would have shrunk without it.

It is also important to note that the overall impact of the regulatory reform may affect asset classes differently. The  use  of  capital  has  become  a  critical  variable  in  banks  management  and  the regulation  imposes new constraints  to the  decisions  on  asset  allocation.  The combined effect of increased capital requirements and the liquidity ratios put certain asset classes, like SME lending, at a disadvantage. Notwithstanding, SME lending was not at the core of the financial crisis that gave rise to the regulatory reform. The SME Supporting Factor (SF) came to alleviate the unwarranted overall pressure on SME lending. 

Against  this  background,  the  CRR  included  a  mandate  to  the  EBA  for  an  analysis  of  the  lending trends  and  conditions  for  SMEs,  their  riskiness  during  an  economic  cycle  and  the  consistency  of own funds requirements with the outcome of that analysis. European Banking Federation (EBF) notes that the EBA has already done research and collected valuable information on overall SME performance and lending trends. Many of the questions raised in the discussion paper refer to the experience of individual banks. The EBF consolidated response   gives   indications   received   from   member   banks   but   needs   to   be complemented with the specific feedback from individual banks. An annex with research by the Italian Banking Association is included in this response. It sheds light on the trends of SME lending after the implementation of the SME SF using available data from various sources including the ECB and the Bank of Italy.

The  ultimate  question of the  discussion  paper  is  to  ascertain  if  the  SME  SF  has  supported  SME lending.  Given  the  variety  of  economic  factors  involved  it  is,  in  EBF’s  view,  virtually  impossible  to isolate  the  effect  of  a  single  factor like  the  SME  SF. In this regard, there are a number of factors influencing the SME lending that should be taken into account such as: a reduced demand for credit for investment purposes during economic downturn; the increased banks’ financing costs, reflected in  credit  spreads  negatively  affected  the  demand  for  loans;  the  increasingly  enhanced  credit guarantee schemes used by Governments as policy tool to improve the access to finance by SMEs; the  EIB  support  provided  to  SMEs  reduced  the  financing  constraints. Hence drawing outright conclusions would not be plausible.  The EBA rightly acknowledges this feature in the discussion paper. However some hints can be stated from the observations available. In the opinion of the EBF these observed facts should be highlighted in the EBA assessment:

• In the absence of conclusive empirical evidence estimates take on special significance. A strong point of reference is the estimated impact of capital requirements on the volume of lending. The EBA paper cites some relevant studies including the global one coordinated by the BCBS in 2010 and a more recent one by Méssonier and Monks using EU data from the EBA. Both studies point towards a decline of more than 1% in lending volumes when the capital requirement is lifted by 100 basis points. 
• A simple and straight comparison of data collected in the EBA paper indicates that banks have  roughly  maintained  the  level  of  non-defaulted  SME  lending  in  the  years  after  the crisis.  Indeed,  the  decline  in  lending  volumes  is  equivalent  to  the  increase  in  defaulted assets. Presumably, risk managers cut credit lines to defaulted borrowers and this roughly explains the gap in a situation of limited new credit demand.
• The fact that there is not a liquid market of SME distressed loans explains the seemingly high non-performing rates compared to those of large corporates where the availability of capital has been simultaneously better. In a protracted economic crisis, it is no wonder that the  stock  of  SME  defaulted  assets  piles  up  on  the  balance  sheet  of  banks  giving  the impression of higher riskiness in the SME segment. For a consistent comparison, it would be necessary  to account  for  the  volume  of  write-offs  and  bad  assets  sold  which  are presumably lower in the SME segment.

Full response

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