EBF adviser: Daniel Bouzas

Publication date: 19 March 2019

Key points :

Financial markets are global, market actors are competing on a global level. Regulation should therefore be coordinated globally as far as possible. The financial regulatory reforms introduced in recent years have done much to enhance the stability of the financial markets and market participants. The more stringent capital and liquidity requirements, in particular, are sensible safety nets in a complex environment. It remains reasonable that the G20 and the FSB continue with this coordination. However, we warn against overtightening the regulatory screws at this juncture by introducing further requirements and call for a thorough review of existing regulation.

With regards to content, we would like to note our core findings and remarks, that we understand merit the utmost attention so to ensure a smooth review of regulatory impact and shape the fine-tunings to come.

• SMEs are the main components of the corporate landscape in Europe. Bank loans are the most important and demanded form of SME financing in Europe. The financing mix of SMEs in the EU differs quite substantially from other jurisdictions around the globe and entails varied specificities.

• The impact of regulatory measures in such an SME-filled environment need to be carefully calibrated as to avoid unintended consequences. Regulatory measures taken at European level can be strongly felt. Continued regulatory support to bank financing of the economy is critical to ensure proper financial intermediation and risk management.

• The new regulatory reform might put SME exposures at a disadvantage with regard to other alternative uses of capital in the banking sector. This might be an unintended consequence of the vast regulatory overhaul that has put the banking sector worldwide on a much stronger footing overall (higher need for collateral, long-term loans becoming more difficult etc.).

• These negatives effects have not yet really been perceptible (even if some hints are sprouting). This comes attached to the improvement of the economic situation in recent years/after the crisis, fostered by the unconventional monetary policy by the ECB (phase of zero interest rates), and its asset-purchase programme. However, the Basel III package has not yet been in place over a complete business cycle. In addition to that, modern economies are undergoing structural change and have a strong need for innovation and its financing. The capital requirements need to take into account that the economy need banks that are able to fulfil these financing needs. In addition, SME-focused policies at EU level, in the shape of direct public support or additional regulations on alternative financing methods have occupied the place of banks. However, direct capital market access is unlikely to be able to replace the financing of [average] SMEs. Direct market access is usually a possibility for larger corporates only.

• Policies affecting banks more concretely, have taken very specific shapes at European level, which we reflect on our analysis below: tackling the impact of Basel III and the its finalisation (Basel IV), securitisation, the SME Supporting Factor, the critical issue of NPLs in Europe and changes in its management due to regulation, IFRS 9 and the heightened regulatory scrutiny.

• Regarding other reforms impacting SMEs, as mentioned above, we mention the focus on European topics (in connection with the Capital Markets Union project), dealing with the European SME definition, SME growth markets, regulation of crowdfunding, among others. Specific substitution effects on specific business lines and also with respect to public finance and the different financing mix in innovative companies / new entrepreneurs.

• Finally, we shortly highlight positive voluntary initiatives from the banking to improve the information possibilities of SMEs and their ability to reach the financing they need.

We look forward to discussing these issues more in depth and engaging with you in the more focused consultation to be launched in June to develop more arguments and clarifications.