Basel II: The Future of SME Finance

1
Basel II The Future of SME Finance
3rd Craft, Trade and SME Summit 23 April
2004 Luxembourg Peter Konesny Deutscher
Sparkassen- und Giroverband
Basel II
2
Agenda

• 1. SMEs and the European Economy
• The Barcelona Conclusions
• 2. The Future of SME Finance
• Impacts of Basel II on SME Finance
• SMEs Preparation for Basel II
• 3. Savings Banks and SME Finance

3
SMEs and the European Economy

• European Commission working paper on enterprises
  access to finance found that over 99 of European
  enterprises are small and medium sized (based on
  absolute number of businesses)
• 20 million SMEs in the European Economic Area are
  providing a job for 117 million persons (European
  Observatory Report)
• The European Charter for Small Enterprises
  adopted by EU leaders at the Feira European
  Council in June 2000 identified SME as the most
  promising source of new jobs, innovation,
  economic dynamism and greater social inclusion

4
The Barcelona Conclusions
European Council 15-16 March 2002The
European Council considers that the Basel
Committee on Banking Supervision should ensure
that its work does not result in discrimination
against small and medium sized enterprises and
requests the Commission to present a report on
the consequences of the Basel deliberations for
all sectors of the European economy with
particular attention to SMEs.
5
Agenda

• 1. SMEs and the European Economy
• The Barcelona Conclusions
• 2. The Future of SME Finance
• Impacts of Basel II on SME Finance
• SMEs Preparation for Basel II
• 3. Savings Banks and SME Finance

6
The Future of SME Finance

• Loan finance remains the most important source of
  external finance for SMEs in Europe.
• The financing partnership between banks and SME
  would be damaged by increasing the regulatory
  burden and potentially the capital cadequacy
  requirements for small and medium sized banks.
• If banks have to apportion greater capital
  reserves to SME financing than previously, the
  market for finance may become more restricted for
  SMEs at a time when the larger commercial banks
  are already exiting the retail credit sector.

7
Impacts of Basel II on SME Finance

• On average Basel II does not increase the equity
  base rate (it stays at 8), but it does
• open up the credit termspoor creditworthiness ?
  higher risk ? higher interest ratesgood
  creditworthiness ? lower risk ? lower interest
  rates
• Abolition of unfair cross subsidization of
  customers with poor creditworthiness by customers
  with good creditworthiness
• Increased transparency in arrangement of terms
• Improved level of information in the bank ? More
  realistic rating? More objective price for the
  loan
• The rating leads to fair credit terms

6
8
Impacts of Basel II on SME Finance

• An open rating raises transparency for the
  customer regarding the impacts on his credit
  terms
• Disclosure takes place sooner and communication
  with the house bank becomes more open
• A strengths-and-weaknesses profile of the
  corporate customer can be compiled using
  benchmarks to- extend managerial advisory
  services by the Sparkasse and therefore to-
  improve business management by the company
• Strengthening of the business relationship with
  the customer
• Strengthening of the relationship of trust
  between customer and advisor

6
9
SMEs Preparation for Basel II

• Customers can influence the rating internally
• Development of managerial know-how in management
• Use of business planning and management
  instruments
• Improvement of profitability
• Strengthening of equity basis
• Securing of market position
• Arranging the successor question
• Professional company management

6
10
SMEs Preparation for Basel II

• Customers can also influence the rating
  externally
• Keeping of bank accounts in line with agreements
• Submission of financial statements etc.- early-
  completely - continually
• Transparency in valuation matters
• Reliability
• Open communication
• Relationship of trust between customer and
  advisor

6
11
Agenda

• 1. SMEs and the European Economy
• The Barcelona Conclusions
• 2. The Future of SME Finance
• Impacts of Basel II on SME Finance
• SMEs Preparation for Basel II
• 3. Savings Banks and SME Finance

12
Savings Banks and SME Finance

• Savings Banks remain committed to SME finance
• by the provision of financial services to all
  people and corporates within the local/regional
  business area,
• by the use of regional market knowledge to the
  benefit of SMEs,
• no abolition of the profitable corporate loan
  business,
• because a general structural change of credit
  portfolios is not possible for regionally active
  banks and is also not their intention.