Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing Consultative Document 7 June 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 FSBs Articles of Association. Contacting the Financial Stability Board Sign up for e-mail alerts: fsb/emailalert Follow the FSB on Twitter: FinStbBoard E-mail the FSB at: fsbfsb Copyright © 2019 Financial Stability Board. Please refer to: fsb/terms_conditionsThe Financial Stability Board (FSB) is seeking comments on its consultative document on Evaluation of the effects of financial regulatory reforms on SME financing. Background With the main elements of the G20 reforms agreed and implementation underway, an analysis of the effects of these reforms is becoming possible. To that end, the FSB developed a Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms that will guide analyses of whether the reforms are achieving their intended outcomes, and help identify material unintended consequences that may have to be addressed, without compromising on the objectives of the reforms. This evaluation examines the effects of financial regulatory reforms on the financing of small and medium-sized enterprises (SMEs). The motivation for this evaluation stems from the need to better understand the effects of the reforms on the financing of real economic activity and their contribution to the G20 objective of strong, sustainable, balanced and inclusive economic growth. The evaluation is part of a broader examination of the effects of the G20 regulatory reforms on financial intermediation. This consultation report sets out the results of the evaluation to date for public comment. The final report will be published in November 2019. Questions for public consultation The FSB invites comments on the consultative document and the following specific questions. Please provide details and supporting information where possible. SME financing trends 1. Structure of SME financing: Does the report accurately describe the characteristics of SME financing provided by banks and other financial institutions? Is there any aspect of SME financing that merits additional analysis? 2. Trends: Are the SME financing trends presented in this report comprehensive? Are there other important trends that should be considered for inclusion? 3. Drivers: Are the drivers of SME financing described in this report comprehensive? How important have demand versus supply factors been for SME financing across jurisdictions and types of firms? Are there other important drivers that should be considered in the evaluation? Financial regulations 4. Regulation vs other factors: Does the report accurately describe the importance of financial regulatory reforms relative to other factors in terms of their impact on SME financing? ii 5. Basel III reforms: Does the report accurately describe the transmission channels through which Basel III reforms impact bank financing to SMEs? Are there other major transmission channels that the evaluation has not considered? 6. Other relevant reforms: Does the report accurately identify financial reforms other than Basel III that might have an effect on SME financing? Through what channels do these reforms function? Please elaborate. Evaluation approach 7. Methodology: Is the analytical approach used to evaluate the effect of reforms appropriate? Are there other approaches to consider for this evaluation? 8. Cost-benefit considerations: Do you have any comments on the considerations of social costs and benefits of the reforms with respect to SME financing? Effects of reforms 9. Effects of G20 reforms on SME financing: Are the findings in the report about the effects of G20 reforms implemented to date (particularly the initial Basel III package agreed in 2010) on SME financing consistent with your own experience? Is there any additional information to support (or contradict) these findings? 10. Effects across jurisdictions: Are Basel III reforms having a differentiated effect on the provision of SME financing (in terms of volumes, pricing and other financing terms) across jurisdictions? If so, what determines the differentiation in effect? Are there other differences in terms of impact that should be considered by the evaluation? 11. Effects of other reforms: G20 reforms that are at an earlier implementation stage and other national financial regulations have only been examined qualitatively. For these regulations, is there any further relevant information about their impact on SME financing that should be considered by the evaluation? 12. Alternative finance: To what extent, if any, have financial reforms created incentives for the provision of financing by non-banks to SMEs of different types and sizes? In particular, how has SME financing through innovative forms (such as FinTech credit platforms) been affected by these reforms? Please elaborate. Additional considerations 13. Other issues: Are there any other issues or relevant factors that should be considered as part of the evaluation? Responses to this consultative document should be sent to fsbfsb by Wednesday 7 August 2019. Responses will be published on the FSBs website unless respondents expressly request otherwise. iii Table of Contents Page Executive summary . 2 1. Introduction . 5 1.1 Motivation and objectives . 5 1.2 Approach . 5 1.3 Structure of the report . 6 2. Market structure, trends and drivers of SME financing . 7 2.1 SME definitions and characteristics . 7 2.2 SME financing needs, sources, trends and drivers . 8 3. Relevant reforms . 19 3.1 Overview . 19 3.2 Implementation status . 19 3.3 Transmission channels . 20 4. Effects of reforms on SME financing . 24 4.1 Qualitative analysis . 24 4.1.1 Basel III capital and liquidity reforms . 24 4.1.2 Other reforms . 26 4.2 Empirical analysis and preliminary findings . 29 4.2.1 Empirical Strategy . 29 4.2.2 Data . 30 4.2.3 Reforms and outcomes studied . 34 4.2.4 Findings . 35 5. Conclusions . 46 5.1 Cost-benefit considerations . 46 5.2 Overall assessment . 47 Annex A: SME definitions and financing trends . 48 Annex B: Public policies implemented across jurisdictions . 58 Annex C: Financial regulations potentially affecting SME financing . 63 Annex D: Stylised example of the impact of changes in regulatory capital . 73 Annex E: Summary of stakeholder feedback . 78 Annex F: Literature review and bibliography . 86 Annex G: Composition of the evaluation working group . 100 iv 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 francs 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 Standards IOSCO International Organization of Securities Commissions v 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 MSE Macroeconomic Assessment Group Micro and small-sized enterprises MSME Micro, small and medium-sized enterprises NPL Non-performing loans 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 enterprises SPV Special purpose vehicle USD US dollar WACC Weighted Average Cost of Capital 1 2 Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprises (SME) financing Consultative document Executive summary This consultative report presents the results of, and seeks comments on, 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. The final report will be published in November 2019. 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 thus far 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, which is subject to additional analysis, is consistent with the literature on the effects of bank capital regulations and with stakeholder feedback that SME financing is largely driven by factors other than financial regulation. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SME