Average 10% cut in SME loan charges possible under Basel II

Loans to smaller businesses under the Basel II bank Accord would on average require 10% less protective capital than loans to larger companies under plans being worked on by global banking regulators.

Regulators with the Basel Committee on Banking Supervision, the architect of the Basel II bank capital adequacy Accord, are anxious to resolve the vexed question of lending to small to medium-sized enterprises (SMEs) that has held up progress with the Basel II proposals.

The threshold for classification as an SME seems likely to be firms with a turnover or sales of €40 million ($44 million) or less, with a 0%-20% range in the downward adjustment of capital charges compared with those for lending to corporations.

Some regulators said the SME problem, which has proved potentially the most divisive of all the aspects of Basel II, is virtually resolved. But others cautioned that a number of issues remained open, including whether the threshold should be higher than €40 million and the adjustment range widened to 0%-25% or more. But the average adjustment should be around 10%, regulators said.

Under a 0%-20% range with a €40 million threshold, for instance, there would be a virtually zero adjustment for a firm with sales of €40 million, rising towards 20% for firms with the lowest turnover.

Key meetings to put the seal on the solution will take place in mid-June with a gathering of the Capital Task Force, the senior sub-grouping of the Basel Committee, and in early July when the task force will meet again ahead of a meeting of the full Basel Committee, regulators said.

Some countries, most notably Germany, where the government faces elections in September, feared that the original Basel II proposals would penalise bank lending to SMEs which are seen in many countries as the engine of economic growth.

The risk-based Basel II Accord will determine how much capital banks will have to set aside to guard against the risks of banking. Credit risk – the risk of bank loans turning sour – is the biggest hazard.