Gillian Tett, the origin of banks’ reluctance to lend to SMEs is to be found before the post-2008 financial reforms

With Basel II of June 2004 bank regulators determined that bank equity, and the support banks received from society, could be leveraged by bank borrowers’ offers of net risk adjusted margins in the following way, depending on their credit risk.

If offered by sovereign borrowers rated AAA to AA, then there was no limit.

If offered by sovereign borrowers rated A+ to A, then 62.5 times to 1.

If offered by sovereign borrowers rated BBB+ to BBB-, then 25 times to 1.

If offered by private sector borrowers rated AAA to AA, 62.5 times to 1.

If offered by private sector borrowers rated A+ to A, then 25 times to 1

And if offered by those unrated or rated BB+ to B-, then 12.5 times to 1. 

Clearly the offers of net risk adjusted margins provided by the usually unrated SMEs and entrepreneurs, had the lowest value to the banks.

Sir, that is why I do not understand when Gillian Tett now writes: “Small business also requires a wider range of financing channels, particularly since one very unfortunate consequence of the post-2008 financial reforms is that banks are now very unwilling to provide funding for smaller companies” “New York steals Silicon Valley’s crown” December 11.

Of course the financial crisis made a huge dent in bank capital, and therefore banks are very averse to lending to those who generates them the highest capital requirements, but which are the post-2008 financial reforms that have made banks more unwilling to lend to SMEs?

In fact it was that kind of discrimination that drove banks excessively into the arms of what was perceived as safe, like AAA rated securities, loans to Greece and all other “safe” exposures, which caused the 2007-08 crisis. 

We must get to the heart of the problem since if SMEs and entrepreneurs are denied fair access to bank credit there is no future for our economies. God make us daring!

@PerKurowski ©