FSB Receives Feedback on Impact of Regulatory Reforms on SME Financing

By Regulatory News

March 26, 2019

Solvency II, Basel III, Stress Testing

FSB published the feedback it received on the effects of financial regulatory reforms on small- and medium-sized enterprises (SME) financing. About twenty organizations, including Moody's Investors Service, European Banking Federation, Bank Policy Institute, Institute of International Finance, NASDAQ, and World Council of Credit Unions, responded to this call for feedback. FSB, on February 25, 2019, had requested stakeholder feedback on the specified issues and it will use the feedback to prepare its draft report on SME evaluation, 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.

On February 25, 2019, FSB had also published a note that summarizes the main concerns raised in the FSB roundtable on the effects of financial regulatory reforms on SME financing. At the FSB roundtable, 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

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

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