Response to discussion Paper and Call for Evidence on SMEs and the SME Supporting Factor
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However , the availability of financial information on SMEs varies from one country to another and is linked to the local authorities’ requirements : small enterprises are often exempted from publishing financial statements (see in France the “X07” quotation from Banque de France ). Institutions are dependent on this public information especially for the small and standard operations (eligible to “on line” decision for example). Then, if a European definition of SMEs were to be reviewed, it should not use too fine parameters that, in some jurisdictions, would not be available or would be available with great difficulties.
We agree with the importance of a unified definition of SMEs for reporting purposes at a European level. Yet, considering the EU objective to encourage enterprises investment, we recommend to extend the supporting factor over those thresholds to larger SMEs, in order to avoid cliff effects: the SME supporting factor has an impact on the cost of business for institutions, and thus on the pricing, and so these “prudential thresholds” are not an incentive for SMEs to grow.
It would also have a positive impact on the European economy to extend the supporting factor to micro entrepreneurs and startups.
The second proposed method seems to require too fine and numerous parameters. The analysis of profitability, leverage, activity, liquidity and coverage requires data that are not always available from SMEs. It seems not adapted to SMEs risk measurement.
The activity sector of the SME is also of main importance.
For leasing especially, the type of equipment financed, and the evolution of its market are also of main importance.
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.
Most leasing companies in France are credit institutions. The biggest contributors to leasing are banks subsidiaries fully regulated through CRR. RWAs are strictly calculated and followed, most often at the mother bank level. There are systems in place to track the reduction in capital due to the application of the SME supporting factor. For those institutions concerned, the COREP report includes a specific line.Q2: 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.
Capital requirement due to the type of exposure is definitely a main factor to determine credit allocations. The SME supporting factor is with no doubt an incentive to grant financing to SMEs. Yet, it is difficult to determine precisely the role of the SME supporting factor, taking into account that the measure is recent on the one hand, and that, on the other hand, there are other factors to be considered in the decision process of lending. For instance, liquidity costs, the volume of lending and riskiness analyses are also important in the decision process. For leasing, the type of equipment leased and the evolution of its market is also of major importance. The decision to lend or not follows a matrix of several parameters. Yet, within this matrix, capital allocation is of major importance. One can observe a rise in the production of leasing and factoring in 2014 in France (new volumes 2014/2013 increases by 4,4% for leasing, and by 13% for factoring) and in Europe (new volumes 2014/2013 increases by 6.7% for leasing, and by 7.2% for factoring), with no reduction, and probably an increase in the proportion of SMEs. Then, although it is difficult to isolate the single impact of the SME supporting factor, we testify that it is certain that it has taken an important role in SMEs financing decision processes.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.
The definition of SMEs used by French leasing and factoring institutions are in line with the criteria of a turnover < 50 M€ and exposure < 1, 5 M€. For institutions that are subsidiaries of banks, the filters are determined at a mother bank level, in order to harmonize the reports. Criteria are usually determined in order to be on line with the EU reporting requirements.However , the availability of financial information on SMEs varies from one country to another and is linked to the local authorities’ requirements : small enterprises are often exempted from publishing financial statements (see in France the “X07” quotation from Banque de France ). Institutions are dependent on this public information especially for the small and standard operations (eligible to “on line” decision for example). Then, if a European definition of SMEs were to be reviewed, it should not use too fine parameters that, in some jurisdictions, would not be available or would be available with great difficulties.
We agree with the importance of a unified definition of SMEs for reporting purposes at a European level. Yet, considering the EU objective to encourage enterprises investment, we recommend to extend the supporting factor over those thresholds to larger SMEs, in order to avoid cliff effects: the SME supporting factor has an impact on the cost of business for institutions, and thus on the pricing, and so these “prudential thresholds” are not an incentive for SMEs to grow.
It would also have a positive impact on the European economy to extend the supporting factor to micro entrepreneurs and startups.
Q4: 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)?
See Q3Q5: Do you see merits in having a harmonised definition of SMEs for reporting purposes? Yes/No. Please explain and provide specific examples.
See Q3Q6: Do you agree with the proposed measures of SME riskiness? Yes/No. Are some of these measures more relevant than others? Yes/No.
Default rates should be relevant on a rather large time window since they have been available since 2007. From this point of view, we underline the low risk profile of leasing and factoring activities that are asset based lending activities . The property of the asset reduces the risk of lending. The unique feature of a asset based lending is the lender’s ownership of the financed asset. These ownership rights provide lenders with a valuable and efficient form of in-built security which makes lending extremely low-risk. Asset ownership represents a major advantage for lessors and factors compared to other financial products such as traditional loans, which are typically not secured on assets but rather with other types of financial collateral or personal guarantees.The second proposed method seems to require too fine and numerous parameters. The analysis of profitability, leverage, activity, liquidity and coverage requires data that are not always available from SMEs. It seems not adapted to SMEs risk measurement.
Q7: 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.
We also underline the importance of the activity sector to analyze the riskiness of SMEs. Especially in asset based lending activities. For the risk to be rightly measured, the SME’s activity has to be replaced in its market environment.Q8: In your experience, are SMEs as cyclical or more/less cyclical than large enterprises?
See Q7Q9: 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.
See Q7Q10: 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.
See Q6Q11: Do you agree with the above interpretation of statistical data on lending trends and conditions? Yes/No. If no, please explain.
The interpretation of statistical data on lending trends and conditions should be nuanced. One of the consequence of the financial crisis has been a reduction in the investment of the private sector, and then in credit demand. It seems that the general level of investment is an important parameter to introduce in the analysis.Q12: 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.
Institutions usually proceed annually to the analysis of the previous year lending activity. Then, even if the impact of the supporting factor has not been isolated as a single parameter, it has been taken into account in the lending policies towards SMEs settled in 2014 and 2015.Q13: 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.
Riskiness of borrowers, liquidity costs, volume of the transactions remain important parameters aside the SME supporting factor taken into account in the lending process.The activity sector of the SME is also of main importance.
For leasing especially, the type of equipment financed, and the evolution of its market are also of main importance.