By Robin Jarvis, Head of Small Business Affairs at ACCA
Implementing the International Framework for Bank Capital and Liquidity - known as Basel III and its European version, incorporated in the Capital Requirements Package (CRDIV), unveiled today - is likely to reduce lending to small and medium sized enterprises (SMEs), says the Association of Chartered Certified Accountants ACCA.
The global professional body sets out its latest thinking on the issue in a new discussion paper published today called Basel III and SMEs: Framing the debate.
Ahead of the European Commission’s long-awaited CRDIV legislative proposal which will apply Basel III in Europe, ACCA is calling for an SME impact assessment and is asking for input from business associations, governments and the banking industry in an effort to enhance the evidence base for this.
Basel III and its European version aim to strengthen the regulation, supervision and risk management of the banking sector, with the aim of mitigating or avoiding future financial crises. Yet even though the need for a new framework is accepted by all, both regulators and the banking industry have warned that its implementation will have a disproportionately negative impact on SMEs’ access to finance. ACCA argues that an impact assessment is needed into how negative this will be, and in what ways, which remains unclear.
Professor Robin Jarvis, Head of Small Business Affairs at ACCA and a member of the European Banking Authority (EBA) Banking Stakeholders’ Group, says: “The macro impact assessments we’ve seen so far are extremely rigorous but they are unable to discuss in any detail the impact of Basel III on the businesses that produce half of the world’s private sector output and employ two thirds of the global workforce. It could be a case of being very precisely wrong, as opposed to approximately right.”
ACCA acknowledges that a similarly quantitative SME impact assessment for Basel III and the CRDIV would be problematic in many ways.
Professor Jarvis explains: “We know that suitable data are unavailable; the definitions used across different countries, let alone different lenders, can vary; and of course some of the provisions of Basel III, such as the new liquidity rules, are new to regulators and regulated parties alike. But these issues have held back the debate for too long and we need to make progress.”
Professor Jarvis adds: “We don’t expect to get a single number that is the ‘Answer to Life, the Universe and Everything’. But we know lenders have a finite number of options and there are ways of anticipating, from the characteristics of individual lenders, their customers and the industries they work in, which ones they will utilise. It is possible, with the right information, to map out how Basel III will be implemented in small business lending.”
The discussion paper notes that while interest rate hikes are the easiest response for regulators to model, in the case of SMEs lenders are just as likely - if not more so - to ration their capital and say 'no' to previously acceptable risks. According to the academic literature, banks with larger market shares and more centralised processes are less likely to ration their capital and more likely to try to model and price higher levels of risk, but it is not clear what they will do in this case. Nor is this the end of the matter as ACCA’s discussion paper anticipates that lenders will make qualitative changes to their business models to ensure their SME lending operations continue to deliver the desired returns under Basel III.
Robin Jarvis concludes: “Regarding the CRDIV, as a global accountancy body we want to make sure that any implementation of the new rules is based on reciprocity among trading blocks. We expect all major markets to implement Basel III in a harmonised way in order to avoid distortions, and that this makes Europe's position as one of the first movers slightly more challenging.”
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