Basel III rules and their consequences
In the wake of the financial and economic crisis, the leading economic nations agreed to tighter banking regulations. The aim was to make banks more resistant to crises, and to make the financial system more efficient. The set of rules developed and adopted in this context is generally known under the term “Basel III”. Basel III is thus primarily aimed at credit institutions, but inevitably also has a direct influence on lending to small and medium-sized enterprises in Germany and Europe.
Basically, Basel III defines new or significantly more restrictive and risk-oriented liquidity and equity coverage ratios for banks. In practice, these result in a significant increase in the cost of granting loans to customers with weaker or unstable ratings from the banks’ point of view. Particularly, the granting of long-term financial resources to medium-sized companies with a weak balance sheet structure or rating has been made considerably more difficult by Basel III for traditional commercial banks and is thus frequently prevented in reality.
As a result, alternative financiers such as private debt funds and direct lending funds have begun to close the gap left behind. These alternative investors – who, in contrast to banks, generally have the sole purpose of granting corporate loans – are subject to much lower regulatory requirements. They are thus able to offer more flexible forms and conditions of financing that are appropriate to the individual risk. In the meantime, especially Anglo-Saxon investors with dependencies in continental Europe have become established and respected players in the SME financing market. It can be assumed that their importance will continue to increase in the coming years and that this segment will establish itself as a veritable alternative to conventional commercial banks.
In the wake of Basel III, capital market-oriented forms of financing such as (listed) bonds or promissory note loans have also gained in importance. Ultimately, these instruments are also essentially motivated by the need to avoid complex and subsequently expensive bank regulation in order to open up and facilitate risk-adequate financing channels between interested investors and small and medium-sized enterprises. Insurance companies and pension funds in particular are frequently among the investors in this form of financing, which is generally standardized, with uniform, transparent legal documentation. From the investor’s point of view, the tradability of these securities also increases liquidity and is therefore easy to regulate and ultimately lowers costs.