The weighting game

16 February 2012 By George Hay Follow @gfhay

Brussels may cut the capital that banks hold against small business loans, hoping lenders will then extend more credit to the engine of economic growth. But it’s not yet clear that current risk weightings are wrong. Massaging them for political ends could damage confidence.

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European banks may be allowed to reduce their risk-weightings on loans to small and medium-sized enterprises under an amendment being considered to Capital Requirements Directive 4, the European Union’s implementation of the Basel III capital rules.
Under Basel II, SME loans are generally risk-weighted at between 75 and 100 percent of their nominal value. The European Commission’s CRD 4 proposals published on July 20 last year stated that the European Banking Authority should investigate reducing the current risk-weighting level by a third, which would mean SME loans were weighted at around 50 percent.
The EBA will report on whether there is a case to reduce SME risk weights by Sept. 1.

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