FSB published the final report on evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing. FSB also published an overview of the responses received to the consultation on this evaluation, which was conducted from June 07, 2019 to August 07, 2019. The evaluation concludes that, for the reforms in scope, the analysis does not identify material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. However, evidence suggests 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 banks that were least capitalized ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary.
The report begins by providing an overview of SME definitions, importance, and characteristics as well as describes the overall structure, trends, and drivers in SME financing. It then outlines the relevant reforms potentially affecting SME finance, along with their implementation timelines and possible transmission channels. Next, it presents the results of the qualitative and empirical analysis on effects before concluding with an overall assessment of the effects on SME financing. Accompanying the report is a Technical Appendix that provides more information on the empirical analysis that was carried out as part of the evaluation. The report evaluates the impact of the initial Basel III capital and liquidity requirements that were agreed in 2010 and that constitute the most relevant reforms implemented to date. These reforms have been evaluated using both qualitative and quantitative analysis. Consistent with the FSB evaluation framework, other relevant reforms that are at an earlier implementation stage or that are national or regional regulations were only analyzed qualitatively.
The report reveals that the impact of Basel III on SME financing was not homogeneous. Analysis of the country-level FSB data reveals only weak evidence of a relative negative impact of risk-based tier 1 capital ratio (RBC) reforms on SME lending growth rates in countries with relatively less capitalized banking systems before the reforms. For the full sample of 22 FSB jurisdictions, the RBC reforms are not found to have had either temporary or persistent effects on the pace of SME or total corporate lending in jurisdictions with relatively less capitalized banking systems relative to other jurisdictions. However, for a subset of jurisdictions that provided information on tenors, short term and long term credit were negatively affected in jurisdictions with less capitalized banking systems relative to other jurisdictions. For the remaining regulations (Leverage Ratio, G-SIB/D-SIB higher loss-absorbency requirements, Liquidity Coverage Ratio), no robust evidence was found for an impact on bank lending to SMEs. Some regulations, such as Leverage Ratio, were implemented very recently and it may take time for their effect to show up on banks’ balance sheets. The fact that RBC exhibits more significant effects than other reforms might be related to it being the first reform that was announced and implemented.
Furthermore, changes to accounting standards for expected credit loss were cited by stakeholders as potentially affecting SME financing. These concerns stem from worries about a sudden increase in loan-loss provisions and higher volatility of earnings in general, which may incentivize banks to reduce the maturity of SME loans, request higher collateralization, and reduce credit availability in a downturn. 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 (2023 for non-SEC filers)—a meaningful analysis of their effects on SME financing is not possible at present. Additionally, several jurisdictions that have implemented the G20 post-crisis reforms have also adopted additional regulatory requirements that may impact SME financing. Examples of such regulatory requirements include the capital reduction for SME lending introduced by the Capital Requirements Directive and Regulation in EU, the stress testing frameworks in the U.S. and other jurisdictions, and Anti-Money Laundering and Combating the Financing of Terrorism as well as know-your-customer requirements. Some studies and stakeholders note that stress testing requirements may have affected SME lending for the banks subject to the requirements vis-à-vis other banks, but the evidence on overall lending to SMEs is mixed.
Keywords: International, Banking, Accounting, SME, Regulatory Reform, Basel III, IFRS 9, Credit Risk, Liquidity Risk, Regulatory Capital, Regulatory Capital, SME Financing, FSB
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