SMEs concerned over Basel II rules

By David Ferguson

Date: 06/11/03

GLOBAL bankers will urge Internal Market Commissioner Frits Bolkestein to be more SME-friendly at a conference next week.

At the 12 November meeting, MEP Alexander Radwan will relay growing concerns by small- and medium-sized enterprises about the European Commission's Capital Adequacy Directive. The Brussels conference, organized by PricewaterhouseCoopers, will attract high-level global bank experts including Roger Ferguson, vice-chairman of the US Federal Reserve Board, and Helmut Bauer, director of Germany's financial supervisory authority BaFin.

"Basel II aims at internationally active banks, so there's work to be done to make the agreement SME-friendlier. The inclusion of physical collateral is urgently needed. Banks must make ratings transparent to clients," said Radwan. He regrets that Basel II came into existence without any form of proper democratic mandate: "The European Parliament and national parliaments have been bypassed," said the Bavarian conservative (CSU) deputy, whose Basel II report was adopted by Parliament last month.

Since 1999, the Basel Committee on Banking Supervision has been elaborating a New Capital Accord to replace 1988 rules on how major banks maintain capital adequacy. Pointing to an impact study in July, and a consultation that closed on 22 October, Bolkestein's spokesman Jonathan Todd dismissed assertions that the policy process is undemocratic.

The European Commission will base its Capital Adequacy Directive on a finalized Basel II agreement. However, the Commission and European Central Bank only participate as observers in the Basel Committee. And, although nine EU countries, including Luxembourg, are represented on the 13-member committee, Austria, Denmark, Finland, Greece, Ireland and Portugal are excluded.

At a mid-October meeting in Madrid, the committee delayed the deadline for approval of Basel II by six months until mid-2004. US pressure had forced the removal of a requirement that banks hold capital for expected, and not just unexpected, losses.

Delays due to changing US demands, and lengthy consultation procedures, may also jeopardize European investments.

"Large European banks will spend, on average, €115 million over five years to comply with Basel II. Leaders will snap up Basel II laggards and implement their superior risk-management practices to free up blocks of capital," said Forrester research director Remus Brett.

Cap Gemini Ernst & Young in Sweden calculates costs of up to €90 million for a large Scandinavian bank. "The planned Basel regulations started a process that cannot be turned around. Basel II has to be approved as soon as possible," said Bundesbank President Ernst Welteke.

Eurochambres President Christoph Leitl wants outlays cut for Basel II, now a complex 200-page document, and for the Commission's Capital Adequacy Directive: "The imbalance between US and European implementation costs must be solved. If unchanged, there will be no SME venture capital from European banks. Basel II will not affect small SME banks in the US. This is a clear competitive disadvantage for European small business."

The Commission will apply new regulations to all EU banks, unlike the US where only the ten largest banks are affected. According to the European Private Equity & Venture Capital Association, proposed Basel II regulations may cost European firms up to €10 billion in equity finance.

• David Ferguson is a business specialist at www.euro-correspondent.com

Small and medium-sized enterprises are concerned about the European Commission's Capital Adequacy Directive.