20 July 2011

Basel III, CRD IV and small businesses – It's time for clarity, says ACCA

Implementing the international framework for bank capital and liquidity known as Basel III and its European version, incorporated in the Capital Requirements Package, or CRD IV, is likely to reduce lending to SMEs, says ACCA.

Ahead of the European Commission’s long-awaited Capital Requirements legislative proposal (CRD IV) - converted into a Regulation and a Directive - which will apply Basel III in Europe, the global accountancy body calls for an SME impact assessment and is asking for input from business associations, governments and the banking industry in an effort to enhance the evidence base for this.

Basel III and its European version aim to strengthen the regulation, supervision and risk management of the banking sector, with the aim of mitigating or avoiding future financial crises. Yet even though the need for a new framework is accepted by all, both regulators and the banking industry have warned that its implementation will have a disproportionately negative impact on SMEs’ access to finance. ACCA argues that an impact assessment is needed into how negative this will be, and in what ways, which remains unclear.

Professor Robin Jarvis, Head of Small Business Affairs at ACCA and a member of the European Banking Authority (EBA) Banking Stakeholders’ Group, says: "The macro impact assessments we’ve seen so far are extremely rigorous but they are unable to discuss in any detail the impact of Basel III on the businesses that produce half of the world’s private sector output and employ two thirds of the global workforce. It could be a case of being very precisely wrong, as opposed to approximately right".

ACCA acknowledges that a similarly quantitative SME impact assessment for Basel III and the CRD IV would be problematic in many ways.

Professor Jarvis explained: “We know that suitable data are unavailable; the definitions used across different countries, let alone different lenders, can vary; and of course some of the provisions of Basel III, such as the new liquidity rules, are new to regulators and regulated parties alike. But these issues have held back the debate for too long and we need to make progress.”

"We don’t expect to get a single number that is the answer to Life, the Universe and Everything. But we know lenders have a finite number of options and there are ways of anticipating, from the characteristics of individual lenders, their customers and the industries they work in, which ones they will utilise. It is possible, with the right information, to map out how Basel III will be implemented in small business lending.”

The discussion paper notes that, while interest rate hikes are the easiest response for regulators to model, in the case of SMEs, lenders are just as likely if not more so to ration their capital and just say ‘no’ to previously acceptable risks. According to the academic literature, banks with larger market shares and more centralised processes are less likely to ration their capital and more likely to try to model and price higher levels of risk, but it’s not clear what they will do in this case. Nor is this the end of the matter: the discussion paper anticipates that lenders will make qualitative changes to their business models to ensure their SME lending operations continue to deliver the desired returns under Basel III.

Robin Jarvis concluded: "Regarding the CRD IV, as a global accountancy body we want to make sure that any implementation of the new rules is based on reciprocity among trading blocks. We expect all major markets to implement Basel III in a harmonised way in order to avoid distortions, and that this makes Europe's position as one of the first movers slightly more challenging".

ACCA will now go on to discuss these matters with its global network of stakeholders before returning with a second, more detailed paper later in 2011.

Full paper 

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