Warning on new credit risk rating proposals

The Equipment Leasing and Finance Association (ELFA) has added its voice to calls for risk weighting treatment for commercial leases and loans backed by capital equipment, in response to a proposal issued for comment by the Basel Committee on Banking Supervision.

The US association, along with the Canadian Finance and Leasing Association (CFLA) and Leaseurope, was responding to the consultative document on Revisions to the Standardised Approach for Credit Risk issued by the Bank of International Settlements (BIS).

All three argue 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. ELFA’s response recommends enhanced granularity and risk sensitivity, updated risk weight calibrations and better clarity on the application of the standards to achieve BIS’s goal to strengthen the regulatory capital standard.

According to ELFA, the current risk weightings from 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 William Phelan, president of PayNet and an ELFA and CFLA board member.