In December 2013, the European Banking Authority, EBA, published information that, for the first time, allows for a survey of the risks the banks have actually assessed in their corporate customers and in the report. The Business Development Quarter quarter 4 2013 presented in February shows the banks own risk assessments of small, medium and big companies.
As shown in the diagram, the risk weights for small, medium and large companies are largely identical, and references to the risk justifying higher interest rates for small and medium-sized enterprises are therefore, in my view, incorrect.
At the same time, it should be emphasized that the risk weights are used by banks to calculate the amount of equity required to be resistant to unexpected losses. Banks also compensate for expected losses in the form of loan losses and the calculations leading to risk weights include easing for small businesses. The easing means that the risk weight for small businesses can be the same as for medium and large companies, despite the bank's assessment that the risk of insolvency is greater. Therefore, it can be argued that interest rates for small businesses should be higher.
However, that argument is neutralized by the new Basel 3 rules that apply from the turn of the year. The new rules mean, among other things, that the risk weights for small businesses are reduced by a further less than 24 percent, and the motivated effect on the interest rates of this reduction is greater than the premium motivated to increase the risk of credit losses.
I therefore mean that the differences in interest rates for small, medium and large companies can not be explained by the varying risks. Instead, the differences are, among other things, due to the fact that small and medium-sized companies often lack both sources of funding other than loans and a reference framework for what are reasonable interest rates.
As I highlighted in previous chronicles, as a CFO, you can demonstrate the importance of financial skills by retaking the question of the bank's interest rate terms. Do not discuss interest rate terms based on what interest rates are today but invest an hour in understanding what the interest rates should be and shift the discussion with the bank from dealing with fuzzy regulatory changes to exactly your company's unique situation. What is the risk and a motivated interest for you?