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In addition to direct support measures by national governments as well as by European and international institutions, the regulatory framework may also have an impact on the incentives of banks regarding their exposures to SMEs. Let me note in this context that the European Banking Authority (EBA) has recently published a detailed analysis of the estimated impact of banking solvency regulation on SME lending, with a particular focus on the relevant provisions of the forthcoming capital requirements legislation in the EU. In this regard, a clear distinction should be made between micro- and macro-prudential policy objectives and tools that may have relevance for supporting SME lending.
From a micro-prudential perspective, minimum capital requirements and the underlying risk weights can be considered as the main factors potentially affecting banks’ incentives to lend to SMEs. In the current regulatory framework, there are different provisions affecting SMEs, depending on whether a standardised approach or more sophisticated approaches are used. As regards the standardised approach, loan size plays an important role when defining the risk weight and thus the pertinent capital requirement. To clarify: small-sized loans up to €1 million are treated as retail exposures, and benefit from a lower risk weight of 75 per cent, compared with a risk weight of 100 per cent for unrated corporate loans. Hence, the current regulation treats small-sized loans, which are likely to be taken up mainly by SMEs, in a more favourable manner.
However, for larger, (over €1 million), loans there is no favourable treatment for SMEs under the standardised approach. For unrated loans exceeding €1 million, the treatment of exposures to SMEs and large companies is the same. Only companies with good credit ratings – which are typically larger corporates – benefit from lower risk weights.
Importantly, for banks using the more sophisticated approaches for credit risk, namely the advanced internal ratings-based (IRB) approaches, the current regulatory framework further provides for preferential treatment of SME loans vis-à-vis large corporate exposures.
The Capital Requirements Regulation and Directive, or CRD IV, entails a significant increase in the quality and quantity of capital. While the phasing-in is rather long and expected to end in 2019, the implementation of various capital buffers and the higher level of minimum capital requirements – though clearly beneficial for enhancing financial stability in the long term – are estimated to increase the overall cost of funds. This is likely to be reflected in the interest rates charged to all clients, including SMEs.
Aware of the potential implications for SMEs and with the aim of partly neutralising the potential adverse impact of increased minimum capital requirements, EU co-legislators have agreed on the inclusion of a specific discount factor for exposures to SMEs, for loans up to €1.5 million. This measure is expected to reduce capital requirements for SMEs by about 25 per cent. The ECB supports this proposal and considers it as an important policy tool that may help SMEs in their access to bank finance.
Taking a long-term perspective, together with micro-prudential considerations, the CRD IV will also provide a harmonised legal framework for a range of macro-prudential tools. In this regard, the first policy tool that is explicitly designed to address systemic risk is the counter-cyclical capital buffer, which will be phased in gradually from 2016 onwards. While the primary objective of this buffer is to enhance the resilience of banks by building up buffers in periods of excessive credit growth that can be released when the system as a whole is in distress, a positive side effect of the application of the measure is that it may contribute to smoothing the credit cycle, thus providing funds for corporate clients, including SMEs, also in recessions. This however also implies that as long as we do not have sufficient capital buffers that could be released to absorb losses or to loosen prudential measures regulated by EU law, the use of macro-prudential tools to support SME lending is very limited.
Finally, in a broader context, there is a need for structural market innovation to improve SME financing. Such an innovation would create a market for asset-backed securities, where the underlying assets are loans to SMEs. It could also support the revival of this market segment by increasing its transparency and therefore investor confidence. Having access to a diversified source of finance for SMEs will enhance their resilience through the business cycle. Because SMEs are characterised by their relatively small size and because it is costly to collect information on their projects, they have limited access to capital markets. In this context, securitisation offers an opportunity for the custodians of large pools of European savings, i.e. insurance and pension funds, to channel resources to SMEs. In this vein, the efforts put in place in the Prime Collateralised Securities (PCS) initiative should be commanded. The PCS has defined common criteria on standardisation, quality, simplicity, and transparency with the aim to improve market depth and liquidity for the ABSs. It also includes specific criteria on SME ABS.
Prudential reforms could also help to revive securitisation activity. A key initiative in this field is the so called Solvency II Directive for the insurance sector, which aims to align capital requirements with risks that insurance companies have actually taken in their investing activities. In the current proposal for Solvency II, which will probably come into force on 1 January 2016 with a 10-year phase-in period, the capital requirements for certain securitised products will increase significantly, thus potentially reducing insurers’ willingness to allocate funds to such asset classes. The appropriateness of the capital charges in Solvency II and their consistency with the capital requirement rules under the CRD IV are currently being reviewed by EIOPA. In this regard, particular attention needs to be paid to providing a level playing field for banks and insurers as well as to enhancing long-term financing of the real economy through the securitisation of debt.