Global leasing organisations have responded to revisions to the standardised approach for credit risk proposed by the Basel Committee on banking supervision.
The Equipment Leasing and Finance Association (ELFA), Leaseurope and the Canadian Leasing and Finance Association, supported risk weightings on commercial leases and loans, which reflect the default risk of their customers and the security offered by equipment collateral.
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The associations argued, that default rates are lower for equipment finance debt when compared against other forms of corporate exposures such as non-investment grade bonds or bank corporate loans, citing historical data.
"There is a strong case for differentiating equipment lease finance with a specific risk weight. In Europe, our extensive research shows that leasing transactions have a probability of default that 40% lower than retail SME lending in general. This result is consistent with data for other equipment finance markets, for example in the US and Canada, confirming that businesses will prioritise paying for equipment finance because they need these assets to continue to run their businesses. Furthermore as the asset is a key working tool for the lessee, many defaulted leases regrade back to a healthy situation with a zero loss, resulting in low Loss Given Default too," wrote Leaseurope.
According to ELFA, the current risk weightings from Bank for International Settlements (BIS) treat corporate lending the same by applying a 100% risk weighting across all corporate exposures or a 75% risk weighting across most retail exposures (including many small business leases and loans).
ELFA believes that risk weightings should reflect the underlying default and loss rates of its members’ leases and loans. "If higher risk weights are applied on a ‘one size fits all’ approach for corporate exposures, then the businesses that use equipment finance may pay a higher cost for access to capital than their risks warrant," said president of PayNet and an ELFA and CFLA board member William Phelan.
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