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Post-crisis regulation has not hurt SME lending, Financial Stability Board says

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Post-crisis regulation has not hurt SME lending, Financial Stability Board says

Tougher capital requirements imposed on banks since 2008 global financial crisis have not caused a decline in lending to small and medium-sized enterprises, according to a new study from the Financial Stability Board.

Overall, Basel III, which increases the Tier 1 capital requirement of banks as well as requirements on liquid asset holdings, has not had a material impact on levels of SME lending, although in some countries it may have temporarily slowed its pace, the Nov. 29 report concluded. The FSB, which includes G-20 major economies, monitors the global financial system.

In countries where banks came out of the crisis with weaker capitalization, there was a possible link between tighter regulation and lower levels of lending to SMEs, although the evidence is "weak," according to the FSB.

Lower lending

The FSB set out to study whether the tightening of capital requirements had hampered SME lending in the years since the crash, drawing on a range of sources including interviews with banks, data from commercial providers, an industry questionnaire and a roundtable discussion.

SME lending volumes are generally lower today than they were before the financial crisis, but in most cases this is due to factors other than financial regulation, the FSB said.

While post-crisis reforms have not stopped banks from lending to SMEs, they have had an impact on the type of borrower that gets credit. SMEs that are more creditworthy have, on the whole, obtained more credit and have increased investment following the implementation of risk-based capital reforms.

Rather than reducing lending to SMEs, post-crisis reforms seem to have channeled it to more financially stable and profitable SMEs. But this effect is not unique to SMEs, and has been observed in other forms of lending too, according to the report.

"The findings suggest that Basel III regulatory reforms are associated with a reinforced impact of specific SME borrower characteristics that had proven beneficial to obtain bank funding before reforms entered into force," it said.

"In particular, better capitalized and more profitable firms find it easier to obtain long-term loans after the legal framework of the risk-based capital reform had been implemented."

Full assessment

It is still difficult to quantify the long-term economic impact of tougher post-crisis capital requirements, especially when it comes to SME lending, according to the FSB. A full assessment will most likely not be possible until the global economy has completed its current credit cycle, it said.