The US Small Business Administration regularly report that small and medium sized enterprises – especially new companies – are responsible for the majority of US employment growth. This sector needs creative access to capital, including debt, and access to capital is crucial for any modern, healthy economy.
With a growing global entrepreneurial culture, investors and lenders increasingly need robust credit assessments for small and medium sized innovative businesses.
These diverse borrowers need reliable and cost-effective sources of credit. The traditional way of solving this problem – the purchase of a credit rating from S&P, Moody’s or Fitch for example – is too expensive for this segment.
But pooled credit data, as supplied by major banks with large and diverse loan books to small and medium-sized companies, provides a new opportunity for banks and investors to make faster, more informed credit decisions.
Two recent reports, published in the Q1 2018 edition of Banking Perspectives magazine, address some of these issues.
Greg Baer, President of the Clearing House Association, makes the case for a serious review of the new BCBS “Basel IV” capital standards. He cites Credit Benchmark as an example of pooled credit data serving as a continuous Shared National Credit examination. With this type of data, he says, “The supervisory process could be used to prevent what the Basel Committee fears – a bank understating its risk-weighted assets and thereby holding inappropriately low capital, while preserving the ability of private sector banks to measure risk for capital purposes.“
In an article by Mark Faulkner and David Carruthers, Credit Benchmark show that pooled bank data is now giving insight into the unrated universe of companies and funds, and is already being used by contributor banks to assess their own credit risk estimates by comparison with their peer group.
The pooled data approach also supports diversity of lending, by allowing banks to identify sectors and firm types that are over- or under- represented in credit portfolios.
In addition, pooled credit data gives an opportunity for regulators to adopt a light-touch approach to oversight while ensuring that systemic risk is monitored and managed.
To download both reports, click here.
