Basel III is the global framework governing the regulation of bank capital, liquidity and leverage agreed in the aftermath of the global financial crisis of 2008–9. Its provisions will, for the coming years, determine the banks’ cost of capital and therefore the cost and supply of capital to businesses around the world.
In the summer of 2011, ACCA published Basel III and SMEs: Framing the Debate, which discussed the incomplete evidence on the effect of Basel III on SMEs’ access to finance (ACCA 2011a). Our conclusion then was that these effects could be disproportionate and that regulators’ understanding of these, including the all-important behavioural changes to banks’ business models, was woefully inadequate.
In December 2011, ACCA published CRD IV and Small Businesses: Revisiting the Evidence in Europe (ACCA 2011b), which considered the European Commission’s new proposals for the Fourth Capital Requirements Directive (CRD IV), the EU legislative package implementing Basel III in Europe. The findings reinforced previous evidence, and demonstrated how the forced deleveraging of European banks is likely to affect SME lending.
Yet, as we stressed in both previous papers, there is no doubt of the need to ensure financial stability, or of the substantial benefits it will bring to SMEs. Even business associations are willing to concede that some sacrifice of SME growth can be justified in the interests of financial stability. This final paper tackles the most important question of all: how to find the appropriate trade-off between the two.