16 February 2012

ACCA: From Basel III to alternative sources of funding - Assessing the impact of financial regulation on access to finance for SMEs

"It is crucial to strike the right balance between financial stability and ensuring sufficient access to finance for the real economy. To that end, we need to revise the risk weights for SME loans when implementing the “Basel III” rules on capital requirements in the EU, and further develop and encourage alternative sources of funding, such as equity–orientated instruments and leasing." These were the conclusions of a roundtable recently organised by UEAPME, the voice of Small Businesses in Europe, ACCA (The Association of Chartered Certified Accountants) and Leaseurope.

The need for a new framework to increase the resilience of the financial system is commonly accepted by all. However, many stakeholders, including regulators, the banking industry, as well as small businesses and their advisors, have warned that Basel III and its European version, known as CRDIV, requiring banks to hold more capital, is likely to have a disproportionately negative impact on small and medium-sized enterprises' (SMEs) access to finance, even though this sector had little to do with the causes of the financial crisis. In Europe, given our SMEs' greater dependence on debt, the impact is likely to be even more adverse and it is more important than ever to develop alternative sources of funding - such as venture capital, micro credit, or leasing - namely through the new European Programme for the Competitiveness of Enterprises and SMEs (COSME).

The main conclusions from the roundtable indicate that SME financing is likely to be impacted by financial regulation on capital requirements and liquidity, but that this impact must be balanced with the cost of enhancing financial stability.

Othmar Karas, MEP Rapporteur on CRDIV, however warned that “SMEs must not disproportionately bear this cost” and noted that “there is a broad consensus amongst the industry and EU decision-makers that risk weights for SMEs lending must be adjusted now. The European Banking Authority must undertake its review as a matter of urgency”.

UEAPME’s Economic and Fiscal Policy Director, Gerhard Huemer, further explained that “we need to make sure that guarantees given by guarantee institutions and mutual guarantee schemes are fully recognised by the regulation as risk mitigator and used at national levels. Given that loans will remain an important source of finance to SMEs in the future, it is also very important to explore ways how to ease access to finance through alternative financial instruments such as venture capital, leasing, private equity, or business angels”.

It was nevertheless stressed that a culture change is necessary to make the best of these equity finance instruments, which must be further encouraged.

Jochen Lemlich, representing Leaseurope, added that “given that the crucial role leasing plays in financing SME’s investment, with 40 per cent of all European SMEs making use of this means of financing, it is crucial to ensure that no unintended consequences arise from the changes made to credit risk mitigation framework for physical assets under the CRDIV proposals”.

Robin Jarvis, head of SME Affairs at ACCA concluded by adding: “SMEs, it is widely recognised, make a massive contribution to the EU economy. If the economies of the Member States are to break through this plague of austerity and recession it is critical that they have the opportunity to raise debt finance from banking institutions. Basel III must not be a constraint on these enterprises to raise debt finance."

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