Global Supervisory Bodies Unite to Standardize SME Portfolio Regulation
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In an effort to enhance financial stability, supervisory bodies worldwide have come together to standardize regulations governing Small and Medium-sized Enterprises (SME) portfolios. This initiative is largely driven by the International Convergence of Capital Measurement and Capital Standards of 2001, commonly known as Basel II.
The Basel II Framework
Basel II was founded on self-regulation of banking organizations, aiming to ensure that capital adequacy norms and reserves align with business realities. To achieve this, statistical models are used to determine risk variables, generate debtor ratings based on these factors, and quantify potential impacts on banking organizations’ credit assets quality.
Country-by-Country Analysis
Chile
Chile has chosen a model where banking institutions are responsible for generating statistical information on the SME portfolio, which is then supervised by the Chilean Banking Superintendence.
International Financing Corporation (IFC)
The World Bank and its business financing unit, IFC, provide a definition for segmenting clients’ portfolios based on employee count, total assets, and annual sales.
Systemic Support for El Salvador’s Superintendency of Financial System (SSF)
In an effort to support El Salvador’s SSF, this article explores how various countries have modified their regulations to create a distinct treatment for SME portfolios. Under Basel II, countries can use internal credit risk measuring systems (ICRMS) to segment their portfolios.
Current Regulation Assessment
El Salvador’s SSF has modified its regulations regarding criteria for rating and minimum capital requirements for banking institutions’ portfolios. These changes aim to:
- Increase capital reserve requirements
- Submit institutions to stricter supervision
- Provide necessary tools to comply with the government’s new tasks delegated to the SSF
Conclusion
As the global financial landscape continues to evolve, it is crucial that supervisory bodies work together to establish a unified framework for SME portfolio regulation. This effort will not only strengthen financial stability but also promote economic growth by providing a stable environment for businesses to thrive.