Response to discussion Paper and Call for Evidence on SMEs and the SME Supporting Factor
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* This Rating Scale is used by “Initiative Finanzstandort Deutschland (IFD)”.
Upon reversion, portfolios of cooperative banks may turn out to be more granular, containing less risks insofar. It is due to this fact that the offset of the SME risk weight is justified, as high granularity effectuates low risk, and in the end justifying lower capital backing.
In conclusion, there exists no cyclical link between SME-lending and lending to larger corporates.
An intern inquiry based on nationwide data of cooperative banks confirms a massive surplus coverage of 60,01% in relation to regulatory capital requirements even during the peak of the financial crisis (also see attachment). Taken as a whole, such result of a massive surplus of coverage in regulatory capital requirements supports GVBs claims to maintain the SME supporting factor.
In particular, GVB claims to incorporate national circumstances in regulatory considerations. This concerns conservative generally accepted national acconting standards (N-GAAPs), the fact of early bad debt provisions as well as provisions for lending values in the course of lending. All of those risk-reducing measures are completely disregarded in the ongoing survey.
Q1: Do you have systems in place to track the reduction in capital due to the application of the SME Supporting Factor (capital relief)? Yes/No. Please explain and provide evidence.
NAQ2: In your experience, is the reduction in capital requirements due to the application of the SME Supporting Factor (capital relief) being used to support lending to SMEs? Yes/No. Please explain and provide evidence.
Yes. Loans of Bavarian cooperative banks to corporate customers have increased from 37.396 Mio. € as of Dec 31, 2013 up to 40.293 Mio. € as of June 30, 2015. These clear numbers show that the introduction of the supporting factor for SMEs has turned out to be an important factor. In order to strengthen the regional economy, it is essential that the supporting factor for SMEs is maintained to prevent adverse effects. Moreover, an intern inquiry commissioned by GVB for loans allocable to the SME-segment shows that the quality of such loans – measured by the percentage of distribution of the IFD categories – has substantially improved over a period from June 30, 2004 to Dec 31, 2013. For instance, the percentage in IFD*-category I (highest degree of creditworhiness) of 21,97% as of 2004 has increased up to 43,23% in 2013, whereas in the same time the percentage in IFD-category VI (lowest degree of creditworthiness)shows no material negative change based on 3,27% in 2014 with only minor increases up to 4,04% in 2013.* This Rating Scale is used by “Initiative Finanzstandort Deutschland (IFD)”.
Q3: Is your internal definition of SMEs in line with the definition of SME exposures subject to the SME Supporting Factor? Yes/No. If no, how are you reconciling the internal definition of SMEs with the definition of SMEs subject to Supporting Factor? Please explain and provide specific examples.
NAQ4: In monitoring the total amount owed to you, your parent and subsidiary undertakings, including exposures in default, by the borrower and its group of connected clients (as defined in CRR Article 4(1)(39)), what reasonable steps do you take to ensure that amount does not exceed EUR 1.5 million in accordance with Article 501(2)(c)?
NAQ5: Do you see merits in having a harmonised definition of SMEs for reporting purposes? Yes/No. Please explain and provide specific examples.
NAQ6: Do you agree with the proposed measures of SME riskiness? Yes/No. Are some of these measures more relevant than others? Yes/No.
NAQ7: Are other aspects relevant in your assessment of the creditworthiness/riskiness of potential SME borrowers? Yes/No. If yes, please provide a list of those aspects and explain how you measure SME riskiness.
NAQ8: In your experience, are SMEs as cyclical or more/less cyclical than large enterprises?
As a general rule, cooperative banks are mainly involved in SME-lending. Lending to larger corporates may rather occur in exceptional cases. It follows from the size that cooperative banks will mostly not be able to grant loans to large corporates in the required amount, as large exposure regulation serves as a limiting factor.Upon reversion, portfolios of cooperative banks may turn out to be more granular, containing less risks insofar. It is due to this fact that the offset of the SME risk weight is justified, as high granularity effectuates low risk, and in the end justifying lower capital backing.
In conclusion, there exists no cyclical link between SME-lending and lending to larger corporates.
Q9: Do you agree with the proposed methodology to assess the own funds requirements in relation to SME riskiness? Yes/No. If no, please provide alternative methodologies or indicators, if available.
NAQ10: Did the arrears and loss experience in 2009/2010/2011 exceed an (internal) limit? Yes/No. Were (expected/unexpected) losses adequately covered by loan loss provisions? Yes/No. Please explain and provide specific figures.
Q10.1: No; Q10.2: Yes.An intern inquiry based on nationwide data of cooperative banks confirms a massive surplus coverage of 60,01% in relation to regulatory capital requirements even during the peak of the financial crisis (also see attachment). Taken as a whole, such result of a massive surplus of coverage in regulatory capital requirements supports GVBs claims to maintain the SME supporting factor.
In particular, GVB claims to incorporate national circumstances in regulatory considerations. This concerns conservative generally accepted national acconting standards (N-GAAPs), the fact of early bad debt provisions as well as provisions for lending values in the course of lending. All of those risk-reducing measures are completely disregarded in the ongoing survey.
Q11: Do you agree with the above interpretation of statistical data on lending trends and conditions? Yes/No. If no, please explain.
NAQ12: Since 1 January 2014, have you changed your SME credit lending and assessment policies and procedures, specifically as a result of the introduction of the Supporting Factor? Yes/No. If yes, please explain and provide specific examples.
NAQ13: Have changes to your SME credit lending and assessment policies and procedures been driven by other factors (e.g. competition from alternative sources of SME financing as described in section 4.1)? Yes/No. Please explain and provide specific examples.
NAQ14: In your experience, is there an impact of the SME supporting factor on the volume of SME lending compared to other loans? Yes/No. Please explain and provide evidence.
NAQ15: In your experience, is there an impact of the SME supporting factor on the pricing and overall conditions of SME lending compared to other loans? Yes/No. Please explain and provide evidence.
NAQ16: Do you consider SMEs are a consistent group when it comes to access to credit or should a distinction be made between different types of SMEs (e.g. micro, small and medium ones)? Yes/No. Please explain and provide specific examples.
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