Basel IV could endanger lending to SMEs

Brussels World-famous art museums, a picturesque old town and the Alemannic carnival: Basel is an attraction for tourists. The name of the Swiss city doesn’t sound so good to bankers. Basel is also home to the Interbank Committee. This body has been developing equity standards for the money sector since the mid-1970s – and they are becoming increasingly stringent: the banks have just digested Basel III, and Basel IV is already here.

The EU Commission is currently working on implementing the recent recommendations of the Basel Interbank Committee in EU law. By the summer break, the responsible Commission Vice Valdis Dombrovskis wants to propose an amendment to the Capital Requirements Directive (CRD IV) along with the associated regulation (CRR). The European economy is eagerly awaiting what will come.

One thing is already certain: the banks will definitely be forced to increase their equity once again. The EU banking regulator Eba estimated the additional capital requirements of all European banks at a total of 135 billion euros. Industrial companies are also affected. The fear is that corporate loans for medium-sized companies could become significantly more expensive. There is even talk of an impending credit crunch in EU financial circles.

The nervousness grows. The European industry association Businesseurope intervened in January. Markus Beyrer, executive director of the association, warned the EU in a letter to Dombrovskis that the EU needed “tailor-made implementation” of the latest Basel recommendations. It was right to promote the stability of the financial markets with new supervisory rules. But the “financing needs of companies”, for example for investments, would also have to be taken into account.

The German Association of Private Banks BdB becomes clearer. “38 percent more equity for German banks is not a stick of paper,” says BdB general manager Christian Ossig and demands: “It has to be significantly less, because such an increase would have a significant impact on lending to companies”. German SMEs are particularly affected, as they have no external rating. “Basel IV is a hard blow for these companies,” says Ossig.

Around 70 percent of German companies refrain from having their creditworthiness rated by a rating agency. Even large medium-sized companies save the high expenses for a rating by S&P or Moody’s.

So far, this has not been a problem: the house bank usually also grants the necessary loans on reasonable terms. If there is no external rating, the financial institutions individually evaluate the default risk and the dependent capital deposit using so-called internal models.

Lower limit for internal models

Basel IV is shaking this tradition of German banking – although the EU Commission may not use this term at all. It is only “the finalization of Basel III”, it says in Brussels. In the existing Basel III regulations, a “last piece added”.

However, this piece is so important that one has to speak of Basel IV, the banks object. The Interbank Committee recommended that the use of internal models for corporate loans be drastically restricted.

According to the new Basel guidelines, a lower limit is to be applied to the internal models – the so-called output floor. The risk weight of a loan must not fall below this standardized lower limit. This can lead to higher capital requirements – especially for loans to customers with a high credit rating.

“The transfer of the new rules into European law can lead to a significant deterioration in the conditions of corporate finance,” warns Klaus Deutsch, chief economist of the Federation of German Industries. The financing ability of the German economy must be maintained. “This is all the more true in view of the large investments that are connected with digitalization or the economic transformation towards more sustainability.”

The message has been received by the EU Commission. In circles of the authority one is aware of the problem. Efforts will be made to take the concerns of the economy into account and interpret the Basel guidelines accordingly. However, the commission does not want to throw the controversial output floor completely overboard. An acceptable solution for the European economy is possible within the Basel guidelines, an EU diplomat told the Handelsblatt.

The German banking industry is unlikely to be satisfied with this. She would prefer to use the output floor only as a backstop, i.e. as a safety net, if a bank calculates its internal models unusually aggressively. France and Denmark would support this solution, it said in Brussels. The fact that the Commission deviates so much from the Basel requirements is nevertheless unlikely in financial circles.

However, the Commission’s proposal expected for early summer is not the end of the story. The draft must then be approved by the EU Council of Finance Ministers and the European Parliament. In any case, there should still be changes. Basel IV will enter into force in 2026 at the earliest.

More: A new study commissioned by European banks shows that the planned stricter regulation could put a greater strain on financial institutions than expected.


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