* Basel III, Solvency II to crimp bank funding of SMEs
* Capital rules on securitisation hit company funding
By Paul Taylor
PARIS, Nov 26 With the ink barely dry on new
capital rules for banks, insurers and pension funds, some
European policymakers are already pressing for changes to avoid
strangling investment in credit-starved small business as an
At the heart of the issue is the treatment of asset-backed
securities (ABS), through which banks can bundle up loans made
to companies, sell the resulting package and free themselves up
to do even more lending.
Forcing financial companies to set aside more capital when
they buy ABS seemed like common sense after the 2008 financial
crisis, yet it could hinder economic revival in euro zone states
worst hit by the bloc's debt crisis, economists and market
The debate comes at a time when parts of the European Union,
struggling to emerge from a long recession, are suffering an
investment drought, with weak banks reining in lending for
smaller companies and infrastructure projects.
Even healthy small- and medium-sized enterprises (SMEs) in
Spain or Italy are having to pay 4 or 5 percentage points more
to borrow, when they can get credit at all, than peers in
Germany or Austria.
That reflects financial fragmentation in the euro zone, not
just higher credit risk.
SMEs are the backbone of those economies, providing most
private sector jobs, yet most are too small to issue corporate
bonds, unlike smaller firms in the United States. In Europe,
banks traditionally provide about 80 percent of SME finance.
The European Central Bank (ECB) is leading the charge
against the potentially perverse effects of the new Basel III
bank capital adequacy rules and Solvency 2 EU insurance
ECB executive board member Yves Mersch said this month Basel
III's treatment of ABS is "like calibrating the price of flood
insurance on the experience of New Orleans for a city like
High planned capital charges under Solvency II for insurers
holding ABS would kill the nascent ABS market for financing
small business stone dead, Mersch said in a recent speech.
The executive European Commission has also asked insurance
regulators to ease Solvency II provisions on lending to SMEs.
The Basel Committee in charge of setting global banking
capital standards said in September it would ease capital
requirements on securitized debt within about two years to help
wean banks off cheap central bank money.
But that may come too late for companies struggling now.
Under the Solvency II framework, insurers would have to set
aside capital equivalent to 80 percent of the value of AA-rated
ABS they hold and 40 percent of products rated AAA, compared
with charges for corporate bonds of just 6 and 5 percent
A 2012 survey by the Association for Financial Markets in
Europe (AFME), whose members include the likes of Barclays
, Santander <SAN.MC., Citi and Goldman Sachs
which together hold or manage more than 5 trillion euros,
found Solvency II was likely to cause a permanent drop in
European Internal Market Commissioner Michel Barnier, in
charge of drafting EU financial services regulation, told
Reuters he shared concerns about the potential impact on SME
funding and his staff are looking for a solution.
Politicians and regulators devised the tighter rules in
response to the 2007 sub-prime mortgage crash in the United
States, when a chain default of securitised home loans triggered
the first wave of the global financial crisis.
Barnier said his first duty in the wake of the financial
crisis had been to tackle an absence of rules that had led to
"crazy incentives for risk taking" in the markets.
The ECB's Mersch dismissed comparisons with the sub-prime
fiasco, saying data showed there was an extremely low default
risk among European ABS for small business.
A senior European regulator, speaking on condition of
anonymity, noted Solvency II only comes into force in 2016, and
suggested some ABS rules may be changed before then.
Richard Hopkin, managing director and head of securitization
at the AFME, said he expected both the Basel rules and Solvency
II to be amended favourably. But another potential obstacle is
what assets banks would be allowed to include in their
"cash-like buffers", separate from capital.
If, as current draft proposals suggest, ABS are excluded or
ranked low in the pecking order, "nobody is going to want to
touch them," Hopkin said. "It's negative signalling and won't do
anything to encourage investors to come back."
The European Investment Bank reckons investment in fixed
capital, research and development in the EU suffered an
unprecedented collapse during the crisis and is now about 17
percent below its 2008 peak on average.
In the countries that needed international bailouts -
Greece, Ireland, Portugal and Spain - investment has collapsed
by almost 50 percent.
The chief cause was political and economic uncertainty,
rather than a general lack of finance, but credit is still a
serious constraint, particularly for SMEs most dependent on bank
lending in the hardest-hit countries.
Given the banks' need to deleverage and raise their capital
buffers to meet new EU and global regulatory requirements, EIB
experts say SMEs and young innovative firms now need to tap
securitisation and venture capital to expand and prosper.
An EIB report published this month said authorities should
promote greater use of loan guarantees, securitisation and
venture capital to diversify companies' sources of funding.
Paolo Altichieri, head of global markets at Banca Popolare
de Vicenza in Italy, the only European bank to publicly place a
securitisation this year, said official sector backing through
guarantees or first-loss insurance could help revive the
"Any type of protection scheme would be welcome and might be
an effective catalyst to re-start the lending operations to
SMEs," Altichieri said.
The ECB is pushing for unparalleled transparency on ABS
through its "data warehouse" initiative, that may ultimately
lead to changes in the rules and greater insurer investments.
As Barclays analysts wrote in their European Securitisation
Outlook 2014: "While many of the harsh regulatory initiatives or
proposals from recent years are not yet implemented, some
subsectors (those that 'fund the real economy') might ultimately
benefit from more lenient treatment or could even be promoted by
politics, regulators and central banks".