At a FSB Roundtable this week BPI discussed the main drivers around the weakness in U.S. bank lending to small- and medium-enterprises (SME). The FSB roundtable focused on the impact of G20 reforms on the financing of SMEs. Francisco Covas, BPI’s Head of Research, was one of the speakers on a panel that discussed the effect of reforms on bank financing to SMEs, and in which he characterized U.S. SME bank financing trends as weak relative to trends observed in other advanced economies. Based on Francisco’s own research and other academic papers, the weakness of small business loans on banks’ books is mainly due to the U.S. stress tests, the capital surcharges for global systemic important banks, and compliance with the Dodd-Frank Act. During the discussion, several participants attributed the weakness in U.S.’s SME financing to the U.S. gold-platting of Basel III standards and not the G20 reforms.
Also, during the roundtable several industry representatives from Europe expressed concerns regarding the procyclicality of the new accounting standard – also known as IFRS 9 – on SME financing. Given the cyclicality nature of SMEs, banks are concerned that SME loan allowances will be very volatile and very sensitive to relatively small changes in macroeconomic conditions. This will discourage banks to offer SME loans primarily in economic downturns. There was also some discussion on the impact of G20 reforms on incentivizing nonbank financing to SMEs and if that would weaken financial stability and amplify the impact of the next crisis. The main takeaways of the discussion will be included in a report to be issued to the public ahead of the June 2019 G20 Summit.