The reduction in capital due to the application of the Supporting Factor must be reported in the COREP. The data reported for both Standard and IRB approaches include the total RWA before and after application of the Supporting Factor.
Banks have set up internal systems to collect relevant data to feed their internal monitoring and reporting systems (including COREP reports). The aforementioned systems are specific to each bank and adapted to their organization.
We would like to take this opportunity to raise the following issue regarding the interpretation of article 501 of the Capital Requirements Regulation (« CRR »). The conditions laid down by article 501 of the CRR contemplate:
• Inclusion of the counterparty in the retail or corporate portfolio ;
• Compliance of the counterparty with the definition of SMEs pursuant to the Commission Recommendation 2003/361/EC ;
• Exposure to the counterparty must not exceed EUR 1.5 million.
We infer from these conditions that the application of the Supporting Factor is not subordinated to the purpose of the loan granted to the SMEs. We kindly request the EBA to confirm our interpretation.
From our perspective, the Supporting Factor has played a key role in allowing French banks to support and finance SMEs. Therefore we strongly advocate for maintaining the regime provided for by article 501 of the CRR.
We also consider that:
• it is premature to draw any final conclusion on the effect of the supporting factor considering its recent implementation date;
• it would be inappropriate to repeal this provision at a time when the economy is picking up;
• the EBA should adopt a wider approach to the matter of SMEs bank financing.
As a matter of fact, French banks have continuously granted loans to SMEs to support their development and investment projects. Following the implementation of the Supporting Factor, in particular, the decline in loans granted to SMEs was clearly reversed as shown in (please see annex).
Furthermore, the acceptance rate for loan applications has always remained high during the crisis and did increase after the implementation of the Supporting Factor.
As an illustration the following graph shows that even during the crisis, applications for a loan from French SMEs to support a solid and relevant project would be successful in more than 85% of the cases (the blue bar represents SMEs, the red bar represents medium size companies meeting the following criteria: 250<employees<2500; EUR 50 m<turnover<EUR 1.5 bn; EUR 43 m<total assets<EUR 2bn).
Moreover, according to different studies released over the last months, access to finance for SMEs and more particularly access to bank financing has improved in 2015 compared to previous years.
In the June 2015 issue of its Survey on the access to finance of enterprises in the euro area (“SAFE”) , the European Central Bank (“ECB”) points out that for the period from October 2014 to March 2015, small enterprises reported a “sizeable improvement in net terms” of bank financing (loans and overdrafts) while medium sized-enterprises reported a significant improvement.
According to respondents to the ECB’s survey, availability of bank loans improved significantly in Germany and Spain. Respondents also considered that difficulty in accessing trade credit eased in Belgium (-4%), France (-5%), Italy (-4%), Austria (-5%) and Finland (-1%).
In particular two key indicators should be highlighted:
• the external financing gap, measuring the perceived difference at firm level between the need for external funds and the availability of funds ;
• the overall indicator of financing obstacles defined as the total – expressed in percentages across the euro area – of SMEs reporting rejections of loan applications for which only a limited amount was granted, and loan applications which resulted in an offer rejected by the SME due to high borrowing costs, as well as the total of SMEs not applying for a loan for fear of rejection.
As regards to the latter, the indicator of financing obstacles declined from 16% in the previous survey to 13%.
Regarding the external financing gap, it has been reduced to zero (from 3% in the previous survey) for SMEs in the euro area : France and Italy reported still positive but clearly declining net balances ; a zero balance was recorded in Belgium and Finland; most other countries reported a negative financing gap.
According to the ECB’s survey, the main concern for SMEs is “Finding customers” with 26% of SMEs in the Euro area ranking this as a top issue, followed by:
• “Availability of skilled labour”, “Cost of production” and “Competition” (14%),
• “Regulation” (13%),
• “Access to finance” (11%).
Access to finance is at the time being the least important issue for SMEs.
The steady improvement of access to bank financing for SMEs would not have happened so rapidly without the relief provided by the supporting factor. Nevertheless, we acknowledge that since the supporting factor was introduced on 1st January 2014, it might be too early to draw any definitive conclusion regarding the impact of article 501 of the CRR.
Therefore we consider that it would be premature to envisage any termination of the Supporting Factor before this particular provision had a chance to produce its full effect over a complete economic cycle. This is all the more important that access to finance for SMEs have been impacted over the last years by other economic factors, starting with economic growth and outlook.
As a matter of fact, financing need, or demand, from enterprises is a major driver for financing activities and considering the poor economic conditions and outlook of the last few years, these needs have decreased in proportion with the economic downturn.
As indicated in the June 2015 ECB’s survey, Euro area corporates have however reported an increase in their need for external source of financing and more particularly for bank loans (3% of SMEs reported an increase in their need for bank loans, up from 1% in the previous survey round). SMEs in France, Spain and Italy have thus recently reported increasing financing needs. These needs, particularly for French SMEs, are mainly related to fixed investment and working capital financing. We believe that it would be inappropriate to consider suppressing the supporting factor at a time when SMEs are facing an improved economic outlook, offering better investment prospects and increasing need for bank financing.
Finally we invite EBA to adopt a wider approach to this matter of SMEs bank financing and consider the supporting factor as only one piece of the structure the European Commission is building as part of the Capital Markets Union project, with the ultimate objective to ensure accessibility and availability of capital and funding for SMEs. All new measures taken or legislation adopted in this regard, or amendment to existing measure or legislation, should be consistent with this ultimate objective given the fundamental role SMEs play in creating economic growth and providing employment in the EU.
As a matter of fact bank financing for SMEs is likely to be significantly impacted by several ongoing reforms representing major regulatory challenges for credit institutions. These reforms notably include the Basel Committee’s revision of the standardised approach for credit risk and the introduction of capital floors. Moreover the adoption of IFRS 9, which application is mandatory from January 1st 2018, is expected to increase impairments on SME’s exposures by substantial amounts.
French banks’ definition of an SME is in accordance with Commission Recommendation 2003/361/EC concerning the definition of micro, small and medium-sized enterprises.
We would like to take this opportunity to stress the fact that the way the supporting factor is applied to SMEs leads to a cliff effect. Indeed medium-sized companies with a turnover above 50MEUR would not qualify as a SME from a prudential standpoint, therefore the cost of capital of a loan granted to these medium-sized companies would mathematically increase by 30% all things being equal. Given this unintended effect related to the supporting factor measure, there is an incentive to stay under the 50MEUR turnover threshold. Such effects are well known and constitute a brake on the development of corporates from an SME to a medium-sized company. We think it would be very simple and efficient to smooth this unintended effect by extending the supporting factor to the medium-sized companies’ sub-portfolio.
We would like to take this opportunity to raise the issue of the 1.5 million euros threshold.
Article 501 CRR provides that the supporting factor shall apply to exposures meeting the conditions laid down in the second indent and particularly, where the total amount owed to the institution, parent undertakings and subsidiaries, does not exceed 1.5 million euros.
Since the goal of the supporting factor is to ensure a regular and sufficient flow of bank lending to SMEs, we don’t see the rationale of the 1.5 million threshold. Moreover and as highlighted above, we believe that this limitation could be detrimental to medium sized-enterprises. Therefore we propose to remove the 1.5 million euros threshold.
We fully support a harmonised definition of SME’s for prudential purposes that would include not only medium sized companies, as suggested in our answers to question 3 and 4, but also micro-entrepreneurs and start-ups. All of these counterparties should benefit from a more favourable prudential treatment.
SMEs as defined by the Commission Recommendation 2003/361/EC constitute a rather varied population considering the different sub-categories (medium-sized, small and micro enterprises).
In fact, according to the SMEs Observatory and based on studies carried out by the French National Institute for Statistics and Economic Research (INSEE), the smaller the size of the companies the more heterogeneous they are .
This implies that the measures proposed by the EBA may not all be relevant for part of the SMEs population and that other non-financial criteria should also be taken into account when assessing the riskiness of SMEs including the business sector, the age of the SMEs and its Senior management (please refer also to our answer to question 7). The financial ratios described in EBA’s Discussion Paper, for instance, are based on historical financial information that could be more or less relevant depending on the age of the SMEs. We would also like to point out that financial data are often more difficult to collect for SMEs than for large public companies.
The following criteria could be relevant in assessing riskiness of SMEs:
• Business model;
• Age of the company;
• Life stage of the products;
• Size of the markets;
• The extent to which the company is dependent on
o patents or licences;
o industrial, commercial or financial contracts;
o clients and/or suppliers; new manufacturing processes;
o key persons;
• Senior executive management experience;
• Composition of management or supervisory board;
• Structure of the company’s shareholder equity;
In our experience, cyclicality of SMEs depends on their relevant business sector. According to the SMEs Observatory, SMEs are mostly present in business sectors likely to be significantly impacted in case of an economic slowdown, such as consumer services, restaurants, construction and retailers.
Moreover due to their size and often more fragile financial situation, SMEs are more likely to be impacted by any downturn.
We acknowledge that the EBA has launched an “empirical project” to investigate the issue of consistency of own funds requirements with the riskiness of SMEs. We hope that EBA will make this report available, if conclusive, and allow professionals to comment on it.
Nevertheless we would like to take the opportunity to ask the EBA if such study could be useful for the discussion with the Basel Committee on the revision of the standardised approach for credit risk and the introduction of capital floors.
Please see our answer to question 11.
Generally speaking, we agree with the EBA’s interpretation of lending trends. However we would like to comment on the following points.
• Increasing volume of new lending
Despite a sluggish economy in 2014, credit to enterprises in France has increased by 2.2% in 2015, against 0.2% last year according to the French Credit Ombudsman (“Médiateur du Crédit”). France is thus one of the largest countries in the Euro zone where credit flow to enterprises is increasing.
This momentum can be explained by evolutions of both demand and supply of credit, since the flow of credit does not only depend on the willingness of credit institutions to lend.
As regards to demand, surveys from the ECB (SAFEs) covering the periods from April 2014-September 2014 and October 2014-March 2015 show a steady increase in financing need from SMEs (please see also our answer to question 2). This trend is confirmed by statistics published by the Banque de France and based on a monthly Bank Lending Survey collecting qualitative data among French banks.
The last update of this survey published by the Banque de France, shows an increase in July 2015 of financing need for SMEs due to investments and, to a lesser extent, M&A transactions .
Increasing financing needs are in direct relation with the improvement of SMEs financial conditions in EU over the last 12 months (in the last edition of the SAFE, dated June 2015, a net percentage of SMEs within the Euro zone reported an increase in turnover).
As regards to supply, SAFEs show strong improvements in the conditions of access to credit for SMEs. As of today, approval rates for credit applications in France are among the highest within the Euro zone.
• Conditions of access to credit have improved for SMEs
According to the Credit Ombudsman 2014 Annual Report 3 565 cases were filed with the Credit Ombudsman in 2014, down 16% against the average number of filings over the last two years. Nearly all these cases are related to the rejection of a credit application from an SME.
This decrease is due to gloomier economic conditions in 2014 impacting SMEs financing need (both working capital and investments) but, first and foremost, to a significant improvement of access to bank financing. According to the Banque de France, during the last quarter of 2014 (2014 Q4), 79% of SMEs which applied for a short-term lending were granted a loan, totally or in large proportion, compared to 68% in 2013 Q4. As regards investment lending, the acceptance rate rose from 92% in 2013 Q4 to 93% in 2014 Q4.
Access to credit is still difficult for one SME out of 8 according to Bpifrance, a public investment bank, but the reasons for such difficulty lay with the poor financial condition of the SME as well as its lack of profitability and prospects.
• Rejections of credit application are linked to the financial condition of the SMEs
According to the SMEs Observatory, overall statistics regarding access to credit in France are consistent with statistical reports on the financial condition of SMEs and, more particularly, micro-enterprises. In its report on micro-enterprises financing, published in June 2014, the Observatory pointed out for instance that although 39% of micro-enterprises had no, or only partial, access to credit facilities this proportion was to be viewed in light of the fact that one third of these companies were experiencing difficult situations with insufficient or negative own funds.
More recently, the Credit Ombudsman highlighted two other factors which could influence a rejection decision:
• access to bank financing depends on the type of loan the SME is applying for ; banks are more keen on extending investment credit to support an SME in its development than on lending short term credits to finance the company’s working capital ;
• access to bank financing also depends on the SME’s business sector; as a matter of fact companies in wholesale, construction, textiles and clothing sectors experienced more difficulties to obtain a loan.
• French Banks are committed to SMEs
Following recommendations issued by the SMEs Observatory mid-2014, French banks strengthened their commitment to ensure smooth relations with SMEs and a swift dialogue regarding credit applications, involving in particular commitment from banks to:
• reply to any complete application within 15 days;
• explain rationale of any credit application rejection;
• inform applicants of all means of recourse available;
• improve SMEs’ financial literacy regarding short term financing means.
Banks credit lending and assessment policies and procedures duly take into account the introduction of the SME Supporting Factor, each bank adapting it to its business model commercial practices.
Given the diversity in our members’ business models and commercial practices, it would seem inappropriate to provide an aggregate comment this question.
As mentioned in question 13, given the diversity in our members’ business models and commercial practices, it would seem inappropriate to provide an aggregate comment this question.
As mentioned in question 14, given the diversity in our members’ business models and commercial practices, it would seem inappropriate to provide an aggregate comment this question.
Please refer to our answers to questions 3, 4, 5 and 6.