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Evaluation of the Effects of Financial Regulatory Reforms on Small and Medium-Sized Enterprise (SME) Financing

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Evaluation of the Effects of Financial Regulatory Reforms on Small and Medium-Sized Enterprise (SME) Financing Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing 29 November 2019 The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. Its mandate is set out in the FSB Charter, which governs the policymaking and related activities of the FSB. These activities, including any decisions reached in their context, shall not be binding or give rise to any legal rights or obligations under the FSB’s Articles of Association. Contacting the Financial Stability Board Sign up for e-mail alerts: www.fsb.org/emailalert Follow the FSB on Twitter: @FinStbBoard E-mail the FSB at: [email protected] Copyright © 2019 Financial Stability Board. Please refer to: http://www.fsb.org/terms_conditions Table of Contents Page Executive summary .................................................................................................................... 1 1. Introduction .................................................................................................................. 4 1.1 Motivation and objectives ............................................................................................ 4 1.2 Approach ...................................................................................................................... 4 1.3 Structure of the report .................................................................................................. 5 2. Market structure, trends and drivers of SME financing ............................................... 6 2.1 SME definitions and characteristics ............................................................................. 6 2.2 SME financing needs, sources, trends and drivers ....................................................... 7 3. Relevant reforms ........................................................................................................ 18 3.1 Overview .................................................................................................................... 18 3.2 Implementation status ................................................................................................ 18 3.3 Transmission channels ............................................................................................... 19 4. Effects of reforms on SME financing ........................................................................ 23 4.1 Qualitative analysis .................................................................................................... 23 4.1.1 Basel III capital and liquidity reforms ....................................................................... 23 4.1.2 Other reforms ............................................................................................................. 26 4.2 Empirical analysis and findings ................................................................................. 28 4.2.1 Empirical strategy ...................................................................................................... 28 4.2.2 Data ............................................................................................................................ 30 4.2.3 Reforms and outcomes studied .................................................................................. 34 4.2.4 Findings ...................................................................................................................... 35 5. Conclusions ................................................................................................................ 45 5.1 Cost-benefit considerations ........................................................................................ 45 5.2 Overall assessment ..................................................................................................... 46 Annex A: SME definitions and financing trends ..................................................................... 47 Annex B: Public policies implemented across jurisdictions .................................................... 57 Annex C: Financial regulations potentially affecting SME financing ..................................... 62 Annex D: Stylised example of the impact of changes in regulatory capital ............................ 72 Annex E: Summary of stakeholder feedback ........................................................................... 77 Annex F: Literature review and bibliography .......................................................................... 85 Annex G: Composition of the evaluation working group ........................................................ 99 Abbreviations ABS Asset-backed security AEs Advanced Economies A-IRB Advanced internal ratings-based approach (Basel III) ASF Available stable funding ASU Accounting standards update AT1 Additional tier 1 (capital) BCBS Basel Committee on Banking Supervision BIS Bank for International Settlements CCAR Comprehensive Capital Analysis and Review (US stress test) CCB Capital conservation buffer CCF Credit conversion factor CDP Cassa Depositi e Prestiti (Italian bank) CECL Current expected credit loss model CET1 Common equity tier 1 (capital) CGFS Committee on the Global Financial System CHF Swiss franc CMU Capital Markets Union CoCo Contingent convertible bond CRD Capital Requirements Directive CRR Capital Requirements Regulation DFA Dodd-Frank Act DiD Difference-in-difference (statistical technique) D-SIB Domestic systemically important bank EAD Exposure at default EBA European Banking Authority ECB European Central Bank ECL Expected credit loss EMDEs Emerging Market and Developing Economies ESRB European Systemic Risk Board EU European Union EUR Euro FASB Financial Accounting Standards Board (US) FinTech Financial technology F-IRB Foundation internal ratings-based approach (Basel III) FLS Funding for Lending Scheme (UK) FSB Financial Stability Board G20 Group of 20 GBP Great British pound GDP Gross Domestic Product GFC Global financial crisis G-SIB Global systemically important bank HLA Higher loss absorbency HQLA High quality liquid assets IASB International Accounting Standards Board ICO Initial coin offering IFI International Financial Institution IFRS International Financial Reporting Standard IOSCO International Organization of Securities Commissions IRB Internal ratings-based approach (Basel III) KfW Kreditanstalt für Wiederaufbau KRW Korean won LCR Liquidity Coverage Ratio LGD Loss given default Libor London interbank offered rate LIQ Liquidity ratio LR Leverage Ratio LTRO Long-term refinancing operations MAG Macroeconomic Assessment Group MSE Micro and small-sized enterprise MSME Micro, small and medium-sized enterprise NPL Non-performing loan NSFR Net Stable Funding Ratio OECD Organisation for Economic Co-operation and Development OMT Outright Monetary Transactions (ECB) OTC Over-the-counter (derivatives) P2P Peer-to-peer PD Probability of default QIS Quantitative impact studies RBC Risk-based Tier 1 capital ratio RMB Chinese renminbi RSF Required stable funding (NSFR) RW Risk weight RWAs Risk-weighted assets SA Standardised approach (Basel III) SAFE Survey on access to finance of enterprises (EU) SEC (US) Securities and Exchange Commission SF Supporting Factor (as in SME Supporting Factor) SIB Systemically important bank SIFI Systemically important financial institution SME Small and medium-sized enterprise USD US dollar WACC Weighted Average Cost of Capital Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprises (SME) financing Executive summary This report presents the results of the evaluation of the effects of financial regulatory reforms on the financing of small and medium-sized enterprises (SMEs). It is carried out under the FSB framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms, and is part of a broader evaluation on financial intermediation. Given that banks are the primary providers of external SME financing, the reforms that are most relevant and have been implemented to date are the initial Basel III capital and liquidity requirements agreed in 2010. These reforms were evaluated by means of both qualitative and quantitative analysis. Other G20 reforms that may be relevant for SME financing but are at an earlier implementation stage (e.g. Basel III reforms finalised in December 2017, accounting standards) are only reviewed qualitatively, given the lack of data required for a quantitative assessment. In addition to the G20 reforms, national and regional regulations (e.g. stress tests) may affect SME financing. Consistent with the FSB evaluation framework, these reforms have also been analysed qualitatively. The main conclusion of the evaluation is 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. There is some evidence that the more stringent risk-based capital (RBC) requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at the most “affected” banks (i.e. those least capitalised ex ante) relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. This conclusion is consistent with the literature on the effects
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