IOSCO Issues Report on SME Financing through Capital Markets (with Lofchie Comment)

IOSCO provided recommendations for regulators to facilitate capital raising by small- and medium-sized enterprises ("SMEs") in emerging markets.

IOSCO's report identified a number of challenges that face SMEs when attempting to gain access to market-based financing. It examined past successful measures adopted by regulators and other policymakers to aid SMEs in tapping capital markets. The overall results indicated that "bank loans are the primary source of financing for both publicly and privately held SMEs in most jurisdictions, followed by equity finance, venture capital, and other related governmental and international funds."

According to IOSCO, most of the jurisdictions surveyed have been reviewing their respective regulatory frameworks and are undertaking efforts to facilitate SME access to capital markets. These efforts include (i) "establishing separate equity and fixed income markets with regulatory requirements tailored to SMEs"; (ii) "establishing market advisor and market-making systems"; and (iii) "introducing alternative methods of financing like private equity, venture capital, and securitization."

The IOSCO Board stated that it plans to host a roundtable on the issue of SME access to market-based finance at its next meeting in Toronto in October 2015.

Lofchie Comment:There is some irony in the bank regulators' continued assertion that non-banks that lend money (pejoratively called shadow banks) should be more closely regulated by the banking regulators, when at the same time IOSCO reports that it is necessary for small businesses to turn to alternative sources of funding because bank lending is not sufficient. (Read this report in light of the speech by Governor Brainard and ask is there any relationship between the materially higher capital requirements and the inability of businesses to obtain financing. See Governor Brainard's Remarks.)Perhaps the bank regulators have hit the right space in their determination to making banking safer. But, it should make one uneasy that the bank regulators do not concede that it is impossible to devise a risk-free system; someone in the market must bear the risk of downturns. Further, a system that is as safe as is possible is also likely to be less dynamic. To put this in context, (i) perhaps the markets would be "safer" if no one made loans to small businesses that have a high risk of failure; and (ii) perhaps such a safe market, would also be subject to low (or even negative) growth.

See: Press Release.