The Equipment Leasing and Finance Association (ELFA) responded to a new proposal regarding credit risk under the Basel framework. ELFA is calling 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.

It is significant to note that ELFA, the Canadian Finance and Leasing Association (CFLA) and Leaseurope all have submitted comment letters in responding to the Consultative Document on Revisions to the Standardised Approach for Credit Risk issued by the Bank of International Settlements (BIS).

BIS called for comments on all aspects of the consultative document and the proposed standards text, particularly on the design of the framework. 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.

ELFA, CFLA and Leaseurope’s responses to the proposal each support risk weightings on commercial leases and loans that reflect the default risk of their customers and the security offered by equipment collateral. The associations argue and show with historical data 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.

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). Commercial loans and leases backed by equipment have a history of lower credit losses than other exposures, which qualifies them for risk weightings different than the riskier corporate exposures.

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.

For a copy of the responses, click here.