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    FSB Consultation on Effects of Regulatory Reforms on SME Financing

    June 07, 2019

    FSB launched a consultation on a report on the evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing. This evaluation is a part of the broader examination of the effects of the G20 regulatory reforms on financial intermediation. The evaluation considers the impact of the implementation Basel III and accounting standards such as IFRS 9 and its equivalent in various jurisdictions. The consultation period for this report ends on August 07, 2019 and the final report on the evaluation will be published in November 2019. With this report, FSB also published a Technical Appendix that describes in detail the analytical approaches, data sources, and results of the empirical analysis.

  • The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

    • To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
    • To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
    • To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
    • To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

    The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

     

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    Effective Date: June 18, 2019

    Press Release
  • Proposed Rule 1
  • Proposed Rule 2
  • Proposed Rule 3
  • Presentation on Regulatory Framework (PDF)
  • Presentation on Resolution Plan Rules (PDF)
  • The report first provides an overview of SME definitions and covers the overall structure, trends, and drivers in SME financing. It then outlines relevant reforms potentially affecting SME finance, also presenting their implementation timelines and possible transmission channels. Finally, the report presents the results and conclusions of the qualitative and empirical analysis on the  overall assessment of the effects of the financial regulatory reforms on SME financing. The report also includes annexes with additional information on financial regulations potentially affecting SME financing; a stylized example of the impact of changes in regulatory capital to the cost of bank financing for SME lending. This evaluation report was delivered to G20 finance ministers and Central Bank governors for their meeting in Fukuoka on June 08-09, 2019. 

    For the reforms that are within the scope of this evaluation, the analysis thus far does not identify material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. There is some evidence that the more stringent risk-based capital requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at those banks that were least capitalized relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending toward more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs. Additionally, the alternative, non-traditional forms of financing, such as fintech credit, have seen their importance increase in recent years, albeit from a low base. Other key conclusions of the report are as follows:

    Impact of Basel III reforms. The report states that stakeholders identified Basel III as the most relevant reform impacting the provision of SME lending, although there were mixed views about its importance. A few of them also expressed the concern that Basel III imposed a disproportionate capital charge on equity investment in SMEs, thus discouraging such exposures vis-à-vis debt finance.  By contrast, the leverage ratio and liquidity reforms (and in particular the liquidity coverage ratio, whose implementation is more advanced than for the net stable funding ratio) were found not to exert significant effects. In addition, some stakeholders commented that the cumulative costs of complying with financial regulations may be disproportionately higher for smaller credit institutions, thus offering incentives for them to focus on bigger loans, while others expressed concern about the apparent convergence in business models across large banks that may reduce diversity and build up systemic risks. Some stakeholders also noted that Basel III reforms were not the major constraint to SME financing; that loan maturities have lengthened in recent years; and that capital regulations have impacted countries differently, depending on how they were implemented by the authorities and how successful banks have been at raising capital.

    Impact of accounting standard reforms. Changes to accounting standards for expected credit loss (ECL) were also cited by stakeholders as potentially affecting SME financing, although a comprehensive assessment of their impact is not possible at this stage. Stakeholder concerns about the effects of the new standards (IASB's IFRS 9 and the U.S. FASB's current expected credit loss (CECL) model) stem from worries about a sudden increase in loan-loss provisions and higher volatility of earnings in general, which may offer incentives to banks to reduce the maturity of SME loans, request higher collateralization, and reduce credit availability in a downturn. The presence and magnitude of any potential effects on SME financing will be substantially determined by the way banks implement the standard, as well as by factors such as the composition and quality of their credit assets. Given that the bulk of these changes will only come into effect in the coming years—IFRS 9 was only effective as of January 01, 2018 and CECL is not effective until 2020-21—a meaningful analysis of their effects on SME financing is not possible at present.

     

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    Comment Due Date: August 07, 2019

    Keywords: International, Banking, Accounting, Basel III, Proportionality, IFRS 9, Credit Risk, SME, Regulatory Reform, FSB

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