February 25, 2019

FSB published a note that summarizes the main concerns raised in the FSB roundtable on the effects of financial regulatory reforms on small- and medium-sized enterprise (SME) financing. FSB is also seeking feedback from stakeholders for its evaluation of the effects of financial regulatory reforms on the provision of financing to SMEs. FSB lists the issues it is requesting the feedback on and states that the feedback must be submitted by March 19, 2019.

The goal of the roundtable in Amsterdam was to exchange views with stakeholders on the recent trends and drivers in SME financing across FSB jurisdictions, including the possible effects that financial regulatory reforms may have had on this market. About 35 external participants from financial institutions, trade associations, credit rating agencies, think tanks, academia, and civil society attended the roundtable. Each session included short presentations by selected invitees followed by open discussion. The participants discussed the effects of G20 financial reforms on bank financing to SMEs. The research in this area finds that some regulatory reforms (for example, capital and liquidity requirements) and the introduction of macro-prudential policies seem to generate credit supply effects, particularly if borrowers cannot easily find substitutes. 

It was noted that while internationally agreed reforms play a role, the interaction of the reforms with other domestic regulation and public policies, as well as how the regulation is implemented and interpreted by relevant authorities, ultimately determines the extent to which various economic actors, including SMEs, are affected. Basel III was identified by participants as the most relevant reform. Some participants expressed concern that banks may have increased the pricing and the proportion of secured SME lending—as well as reduced credit to riskier firms—including as a result of the reduced eligibility of collateral (both intangibles and physical collateral) for regulatory capital purposes. In that context, some participants raised the question of whether regulation strikes the right balance in terms of overall financing structure needs of SMEs. Other potentially relevant reforms that the participants identified included the following:

  • Accounting rules (IFRS 9), which may incentivize banks to reduce the maturity of SME loans, to request higher collateralization, and to reduce credit availability in a downturn
  • Insurance regulation such as Solvency II, preventing insurance companies from investing in securitizations of SME loans
  • Domestic stress test frameworks, which may disproportionally affect SME finance because of the penalizing implicit risk-weight assumptions embedded in some of these tests

The evaluation forms part of a broader FSB examination of the effects of post-crisis reforms on financial intermediation. The key takeaways will inform the draft evaluation report, which will be issued for public consultation ahead of the June 2019 G20 Summit. The final report, reflecting the feedback from the public consultation, will be published in October 2019.

 

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Comment Due Date: March 18, 2019

Keywords: International, Accounting, Banking, Insurance, Securities, Regulatory Reform, SME, Basel III, IFRS 9, Solvency II, FSB

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