Regulation: impediment or incentive for co-operative banks to finance SMEs? Isabelle Vaillant, EBA 1rst December 2014

About EBA  Established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of 24 November 2010, come into being as of 1 January 2011, revised in 2013  Single Rule Book on Standards and Guidelines to specify Level 1  Home host Cooperation and Convergence  Risks and Reportings with thematic risk reports, supervisory reporting and stress tests  Special focus on SMEs : - an analysis of the evolution of the lending trends and conditions for SMEs - an analysis of effective riskiness of Union SMEs over a full economic cycle - consistency of own funds requirements laid down for credit risk on exposures to SMEs Regulation: impediment or incentive for co-operative banks to finance SMEs? 2

Weak recovery of SME lending  SME lending has shown an uncertain or weak recovery during and, in some cases, a reversal in 2011 – 12 SME loans decreased in 2012 in countries experiencing severe economic difficulties and a sovereign debt crisis, such as GR, IR and PT. Reversal of the positive trend in Serbia and Slovenia in 2011, with sharp declines in SME loans in BE and HU were the only countries which recorded an accelerated growth in outstanding SME loans over 2011, despite the overall weak growth of the economy. Regulation: impediment or incentive for co-operative banks to finance SMEs? 3 Source: OECD

Co-operative banking plays a crucial role in the European lending market  In 2012, Co-operative banks had total assets of approximately 8280 billion Euros (EACB), which is almost 20% of the assets of the entire European banking sector (OECD).  Co-operative banks are important providers of financing to the European SMEs Co-operative banks cover approximately 1/4th of the SME lending in the EU. Although in absolute numbers the co-operative banks have a smaller share of lending, overall 14% of the lending of co-operative banks goes to SMEs, compared to only 9% of the lending of other banks. Regulation: impediment or incentive for co-operative banks to finance SMEs? 4 Source: preliminary EBA data; based on original exposures pre-conversion factors

EU Regulation: SME Supporting Factor  A supporting discount was granted to banks exposures in SMEs in the CRR/CRD package as an exceptional measure to support the EU efforts of improving access to finance for SMEs.  Preliminary data shows that banks have benefitted so far from this discount factor: Regulation: impediment or incentive for co-operative banks to finance SMEs? 5 Note: Data is provided for both IRB and SA banks Source: EBA preliminary data Whether SMEs are benefitting from the SME supporting factor introduced in the CRR is yet to be assessed.

EU Regulation: Compliance costs  There are understandable concerns voiced with regard the costs that the new regulation will place on the co-operative banks, mainly costs of compliance, which may have disproportionate effect on relatively small in size co-operative banks  Attention of EBA on to Proportionality - The proportionality principle is applied in every policy regulation produced by EBA - small banks are undergoing special tests when conducting the impact assessment of the technical standards - less material transactions are granted simplified treatments  The new era of business models approach in regulation  For example, as part of the impact assessment of the LCR, data was disaggregated by business model, which allowed having a better understanding of the impact of the regulatory measures on different types of banks.  At EU level, the diversity of the business models increases but there is a high concentration of banks in fewer business model categories - Half of the 357 banks included in the QIS sample were classified as predominantly nationally active banks with well diversified activities (Group 12); co-operative banks (Group 3); or savings and loans associations (Group 2). - Other business model categories such as large cross-border groups (Group 1); CCPs and investment banks (Group 7); mortgage banks (Group 6); and other specialised credit institutions (Group13) are also fairly well represented with more than 20 banks included in one of these groups. - On the other hand, private banks (Group 5) and auto-banks, consumer credit banks (Group 8) constitute rather small groups with only 11 banks in each of those two categories. Regulation: impediment or incentive for co-operative banks to finance SMEs? 6

How can Regulation be efficient and successful with regard to small and /or special ? 1/2  Role of associations The body of regulation has significantly increased in the last years. However only a limited share of it is applicable to co-operative banks. It is more and more the role of the associations to provide support to its members on the clarification of these issues, to process and break down the regulation and to channel or even process this information to its members.  Heightened transparency More transparency on the structure of groups is needed to ensure that the capital instruments are able to absorb losses More transparency is also needed on the intra-group flows and services Regulation: impediment or incentive for co-operative banks to finance SMEs? 7

How can Regulation be efficient and successful with regard to small and /or special ? 2/2  Enhanced European regulatory harmonisation is of highest benefits for SMEs More standardisation of SME credit information is needed: e.g. definition of SME, creation of credit registers Standardisation of features of an SME loan and class exposure : e.g. min performance track-record, terms, diversification, limits on total outstanding Increase standardisation of SME credit quality measures and reporting by SMEs Reduce NPL costs via harmonisation - A direct relationship is found: costs of insolvency  NPL ratio levels - Asymmetry of information: the originating bank knows better then anyone the features of an NPL: no other actor is willing to purchase these assets - On 21 October 2013 the EBA released two definitions as amendments of the common EU-wide IFRS Supervisory reporting framework (FINREP) : Definition of Forbearance (FBE) ; Definition of Non-Performing Exposures (NPE) ; in the process of being endorsed by the EU Commission (first reporting: 30/09/2014) ; Definitions used on a best effort basis during the AQRs (cf EBA Recommendation and ECB 23 October Note on Comprehensive Assessment) Regulation: impediment or incentive for co-operative banks to finance SMEs? 8

THANK YOU Questions ? Regulation: impediment or incentive for co-operative banks to finance SMEs? 9

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