Call to protect SMEs from credit-squeeze effect of Basel rules

Date: 30/05/02

By Peter Chapman

A GERMAN MEP has pledged to step in to help save small businesses facing a credit squeeze before new banking rules come into force.

The new 'Basel II' accord - currently being drawn up by a team of international bankers - will update rules that stipulate how much banks must set aside in case some of their loans turn out to be ill-advised.

Crucially, the new rules, due to be unveiled next year, could force banks to keep more money in reserve for loans to riskier borrowers such as small and medium-sized enterprises (SMEs) than for 'triple-A' rated multinationals.

But Parliament Vice-President Ingo Friedrich said MEPs must ensure banks are not discouraged from lending to small firms by the need to set aside cash.

'I fear it is a problem,' said Friedrich, a German Christian Democrat and president of the European Small Businesses Forum since 1990. 'The amount of credit [for small firms] has already gone down as a consequence of Basel II.

'The last decisions have not been taken...but we have to influence them to be more acceptable for small companies,' he added.

Small business is seen as the engine of European economic growth - and is the bedrock of the economies in Germany and Austria, where firms typically borrow long-term to expand rather than issue shares.

But Friedrich said he feared the Basel rules would be a 'mechanistic American approach that is not according to our European tradition'.

MEPs may push for changes when the Commission unveils a draft directive to turn the Basel rules into EU law.

New banking rules due to be unveiled in 2003 may discourage banks from lending to riskier borrowers such as small and medium-sized enterprises, according to MEP Ingo Friedrich.