Home About NEFI Activities Member Contact Imprint

Basle II Statement - September 2001      Activities  This statement was drafted to meet the concerns of the NEFI members with respect to the consultative and working papers of the Basel Committee and the EU Commission. The NEFI group members express their common views on the most important points. The banks organised in NEFI welcome the decision of the Basel Committee to set the year 2005 as date of implementation for the New Accord. They very much agree with the Committee that further efforts are needed to ensure that the new proposals appropriately take account of credit exposures related to small and medium-sized enterprises (SMEs). They also very much appreciate the openness of the EU Commission to a dialogue with industry. They underline the importance of an adequate financing structure for SMEs in Europe for wealth and growth in the European Union, and they are deeply convinced that the efforts made by their institutions in the areas of both lending and equity will help to reach the ultimate goals of the European Union. It is widely known and accepted by the European Union and its member states that SMEs play an important role in the economy as sources of innovation, in the development of the regional economy and in securing and creating employment. Hence the European Union and its member states have paid special attention to SMEs by converging their policies to improve the environment of SMEs. A better access to financing and its reasonable terms and conditions have formed key elements in the European Union policies of safeguarding an improved financial environment for SMEs. As SME financiers the undersigned institutions wish to stress that it is of prime importance that the present proposal of the Basel Committee will be formulated in such a manner that it is in line with the SME policies of the European Union and its member states. Otherwise there is a risk that the new rules might lead to a situation where the banks distance themselves from the financing of SMEs by restricting lending and/or by increasing the cost of financing. That would be a most unwelcome effect of the new rules. In this respect it must be emphasized that it is very important to have sufficiently reliable calculations available on the impact of the proposed new rules on SME financing by banks before any decisions in this matter are taken by the Basel Committee or the European Union institutions. In this context, the banks organised in NEFI wish to make the following important comments: (1) Compilations of broadly diversified and well secured SME portfolios have shown that the implementation of the IRB approach results in the need for a higher level of capital in comparison with the standardised approach: to favour the change to the IRB approach, risk weights of the IRB approach should be reviewed critically. This is all the more important as the present consultation papers require additional capital to be held for operational risk. The IRB approach is negatively affected by the calculation method of the capital charge chosen by the Basel Committee, namely: the capital charge is calculated on the basis of the sum of expected losses (EL) and unexpected losses (UL). Nevertheless, it is uncontroversial that economic capital needs – to which the capital requirements must attend - are determined only by the unexpected losses. Under these conditions, the IRB approach is particularly detrimental to medium and long-term credits to SMEs inasmuch as the probability of default (PD) of SMEs is higher than that of large enterprises. In the framework of the IRB foundation approach this disadvantage is even increased by the fact that the LGD is imposed by the Supervisory Body. The 50% rate seems penalising, too, because collateral accompanying most of the time loans to SMEs is not recognised as a technique to reduce credit risks (for example, the ownership of financed assets in the case of leasing). The new calculation method of the capital charge proposed by the Basel Committee in its “Working Paper on the IRB Treatment of Expected Losses and Future Margin Income” of July 2001 does not fundamentally modify this acknowledgement : - as regards the retail portfolio, the capital charge related to EL should be decreased by the Future Margin Income (FMI). There is no theoretical reason to restrict the use of FMI to the retail portfolio alone. In proposing this calculation the Basel Committee recognises that the capital charge is defined by UL, as globally speaking (for all kinds of portfolios) the amount of FMI is normally superior to EL. Indeed, if it was not the case, the bank should be structurally in deficit. It seems that such a situation has to be reviewed in the framework of the 2nd Pillar. -the recognition by the Basel Committee of the role of the general loan loss provisions (GP) to cover risks is only partial. The cancellation of the ceiling could be an effective incentive to best practices in the field of provisioning (ex-ante provisioning of EL). -the processing of bad loans in the framework of the IRB Foundation Approach should not be more unfavourable to the processing implemented in the framework of the Standardised Approach. (2) The change from the standardised approach to the internal rating-based approach - and with it an improved risk management - should be worthwhile also for those banks which are strongly specialised in financing small and medium-sized customers. The conditions of use of the IRB approach should pay special attention to the constraints of the promotional banks, in particular the practical difficulty for them to annually update the rating of a part of the borrowers. Under these conditions, retail portfolios should include small SMEs or loans up to a certain amount or certain loan categories such as, for example, loans for the financing of start-ups. (3) The Basel Committee has made proposals on the capital requirement of equity exposures (Working Paper on Risk Sensitive Approaches for Equity Exposures in the Banking Book for IRB Banks, August 2001). The unintended effects may be the same as for corporate exposures: the standardised approach is substantially more attractive than the IRB approach. The new Accord should provide banks with the proper incentives to move from the standardised to the IRB approach and ensure the market for equity financing. Risk weights of the IRB approach and the amount of the LDG should therefore be reviewed critically. The planned partial exemption of national promotional programmes is in principle beneficial. However, equity capital financing plays a much greater role for US SMEs than for EU SMEs, since in most of the EU member states long-term financing or guarantees on long-term credits granted by banks predominate. Accordingly, an improvement for loans and guarantees should be called for in the IRB approach . (4) In many member states of the European Union, general economic policies in favour of SMEs include guarantees granted by financial institutions, such as those of some members of NEFI. It is very important that the Basel proposals on Credit Risk Mitigation Techniques do not unduly penalise these operations. The fact that the capital charge of a guaranteed credit depends on the probability of a simultaneous default by both the debtor and the guarantor is not disputed. This probability depends on the credit quality of the debtor and the guarantor as well as on the existing correlation between the debtor’s default and the guarantor’s default. But this reality is not taken into account in the proposals of the Basel Committee related to the processing of credit collateral in the framework of the standardised approach and the foundation IRB approach. Therefore, as regards these approaches, the banks organised in NEFI ask the Supervisory Body for the recognition of the effect of the joint default probability in the calculation of the risk weights. Consequently, the collateral effect should be independent of the nature of the guarantor (i.e. not limited to sovereign entities, PSE and banks), and no exclusion based on the guarantor’s rating or the relative value of default probabilities (or ratings) of the debtor and the guarantor can be considered justified. In particular, it seems very important that the institutions guaranteeing loans to SMEs, irrespective of their status and of, whether they are subject to banking supervision or not, are recognised by the Supervisory Body, notably the reciprocal guarantee companies, since these companies provide typical collateral to SMEs. This request seems all the more justified as the correlation between the event of default of an SME and the event of default of a regulated institution intervening usually in the framework of a mission of general economic interest can reasonably be regarded as very low. (5) The wider recognition of risk mitigation techniques in the framework of the standardised and foundation IRB approaches notably improves the risk evaluation. But this recognition focuses essentially on techniques (collateral on transferable securities, credit derivatives) which are marginally utilised in loans to SMEs. However, these loans generally benefit from collateral techniques, which vary from one country to another in accordance with their legal traditions: collateral generally takes the form of receivables, vehicles, industrial equipment, commercial real estate, stocks, etc. This is all the more relevant in the case of property and equipment leasing, as the lender is also the owner of the assets which it has financed. The financing of SMEs could be strongly penalised if this collateral was not recognised by the Supervisory Body. Since it can be assumed that in view of the long delays of implementation and the high investment costs of the IRB approach numerous small or medium-sized banks will first opt for the standardised approach, the comprehensive recognition of customary banking collateral should be ensured already under this approach. (6) Finally, a differentiation by loan maturities that privileges short-term maturities in comparison with long-term loans would fail to acknowledge the stabilising effects of long-term financing. This statement has been sent to the Commissioners and Director Generals of DG Enterprise, Internal Market, Economic and Finance and to the Chairmen of the Committee on Economic and Monetary Affairs of the European Parliament. printversion