Even though probabilities of default may be higher for individual SMEs, our research identified persuasive empirical evidence that most banks’ holdings of loans to SMEs benefit from a greater degree of diversification than their holdings of loans to larger corporations do. Diversification helps to reduce both a bank’s exposure to the credit risk posed by SME lending and the commensurate need for capital. Moreover, we’ve taken a closer look at the precautions banks take when lending to smaller businesses, such as asking for guarantees or collateral. These measures help to lower further the potential losses a bank might incur in lending to a small business and can similarly reduce the need for capital. Our findings motivated revisions to the proposals that will prevent an across-the-board increase in capital requirements for SME lending. What’s more, our “quantitative impact studies” have generated solid proof showing that, on average, many banks’ requirements will actually decrease. Three changes to the New Accord are especially relevant. ·  First, in addition to an overall flattening of the risk-weight curve for corporate credits, we have reduced directly the capital charges for loans to smaller businesses. For example, banks on the IRB approach will be permitted to adjust downward the capital requirements on exposures to small businesses with up to € million in annual sales. This adjustment will reduce the capital charges on a loan to an SME by as much as 20% compared to the new requirements for larger companies and may in many cases be lower than the current requirements.
When borrowers pledge eligible collateral or guarantees, and thereby reduce the potential loss on an exposure, banks will be able to hold less capital against that exposure than the 1988 Accord stipulates. This change is especially pertinent to SME lending, since national supervisors will be able to recognise several of the types of collateral and guarantees that SMEs provide. Results of QIS 3 How do we know that these adjustments will help SMEs? To ensure that we’ve got it right, the Basel Committee has conducted a series of “quantitative impact studies” with the active support of many commercial banks. Our most recent study, under the name “QIS 3,” was the most comprehensive, involving an extremely detailed survey of how capital requirements will change for over 350 individual banks in more than 40 countries, including in all EU countries. QIS 3 demonstrates clearly that the new rules will not increase the capital required for banks’ credit exposures to SMEs if we compare the new proposals to the current solvency rules. In fact, our studies show that, on average, banks’ capital charges on loans to SMEs included in the corporate portfolio will remain largely stable for banks using the standardised approach to credit risk and will decline by an average of between 3% and 11% for banks on the IRB approach.