Basel II: The Future of SME Finance

EU-Enlargement – SMEs meet the challenge Basel II: The Future of SME Finance 3rd Craft, Trade and SME Summit 23 April 2004 Luxembourg Peter Konesny Deutscher Sparkassen- und Giroverband Basel II

EU-Enlargement – SMEs meet the challenge Agenda • 1. SMEs and the European Economy • The Barcelona Conclusions • 2. The Future of SME Finance • Impacts of Basel II on SME Finance • SME’s Preparation for Basel II • 3. Savings Banks and SME Finance

EU-Enlargement – SMEs meet the challenge SMEs and the European Economy • European Commission working paper on enterprises’ access to finance found that over 99% of European enterprises are small and medium sized (based on absolute number of businesses) • 20 million SMEs in the European Economic Area are providing a job for 117 million persons (European Observatory Report) • The European Charter for Small Enterprises adopted by EU leaders at the Feira European Council in June 2000 identified SME as the most promising source of new jobs, innovation, economic dynamism and greater social inclusion

EU-Enlargement – SMEs meet the challenge The Barcelona Conclusions European Council 15-16 March 2002:”The European Council considers that the Basel Committee on Banking Supervision should ensure that its work does not result in discrimination against small and medium sized enterprises and requests the Commission to present a report on the consequences of the Basel deliberations for all sectors of the European economy with particular attention to SMEs.”

EU-Enlargement – SMEs meet the challenge The Future of SME Finance • Loan finance remains the most important source of external finance for SMEs in Europe. • The financing partnership between banks and SME would be damaged by increasing the regulatory burden and potentially the capital cadequacy requirements for small and medium sized banks. • If banks have to apportion greater capital reserves to SME financing than previously, the market for finance may become more restricted for SMEs at a time when the larger commercial banks are already exiting the retail credit sector.

EU-Enlargement – SMEs meet the challenge Impacts of Basel II on SME Finance • On average Basel II does not increase the equity base rate (it stays at 8%), but it does • open up the credit terms:poor creditworthiness  higher risk higher interest ratesgood creditworthiness  lower risk lower interest rates • Abolition of unfair cross subsidization of customers with poor creditworthiness by customers with good creditworthiness • Increased transparency in arrangement of terms • Improved level of information in the bank  More realistic rating More objective “price” for the loan • The rating leads to “fair” credit terms 6

EU-Enlargement – SMEs meet the challenge Impacts of Basel II on SME Finance • An “open” rating raises transparency for the customer regarding the impacts on his credit terms • Disclosure takes place sooner and communication with the house bank becomes more open • A strengths-and-weaknesses profile of the corporate customer can be compiled using “benchmarks” to- extend managerial advisory services by the Sparkasse and therefore to- improve business management by the company • Strengthening of the business relationship with the customer • Strengthening of the relationship of trust between customer and advisor 6

EU-Enlargement – SMEs meet the challenge SME’s Preparation for Basel II • Customers can “influence” the rating internally: • Development of managerial know-how in management • Use of business planning and management instruments • Improvement of profitability • Strengthening of equity basis • Securing of market position • Arranging the successor question • Professional company management 6

EU-Enlargement – SMEs meet the challenge SME’s Preparation for Basel II • Customers can also “influence” the rating externally: • Keeping of bank accounts in line with agreements • Submission of financial statements etc.- early- completely - continually • Transparency in valuation matters • Reliability • Open communication • Relationship of trust between customer and advisor 6

EU-Enlargement – SMEs meet the challenge Savings Banks and SME Finance • Savings Banks remain committed to SME finance: • by the provision of financial services to all people and corporates within the local/regional business area, • by the use of regional market knowledge to the benefit of SMEs, • no abolition of the profitable corporate loan business, • because a general structural change of credit portfolios is not possible for regionally active banks and is also not their intention.

Basel II: The Future of SME Finance