EU lawmakers agree on softer capital buffers for SME loans

* EU capital rules a third lower for SME lending

* Rules to make loans for SMEs cheaper

* SME lending still in decline - ECB

By Claire Davenport

BRUSSELS, Oct 5 (Reuters) - EU lawmakers have agreed withcountries on cutting the amount of capital banks must holdagainst loans to smaller companies, resolving one of severalissues holding up the implementation of the Basel III capitalrules in Europe, a negotiator said.

"The European Parliament managed to push through its demandsthat credit to small and medium-sized business will be helped bya lower risk-weighting of a third," Othmar Karas, who is leadingnegotiations with countries on behalf of the parliament, said onFriday.

Global regulatory standards - or Basel III - set by theBasel Bank for International Settlements asks banks to increasetheir capital reserves to act as a buffer against loan losses.

EU regulators have drafted their fourth Capital RequirementsDirective to implement Basel III in European law, but talks havebeen delayed by conflicts over how to treat different types ofloans made by banks.

"Now the banking regulation can contribute to financinggrowth and the real economy," said Karas, an Austrian lawmakerin the European Parliament.

Talks between the European Commission, countryrepresentatives and the European Parliament are set to resumenext Wednesday.

Small and medium-sized businesses make up the backbone ofthe European economy, but their growth has slowed as banks growincreasingly reluctant to lend to them.

By changing the capital rules lawmakers make it cheaper forbanks to make those loans.

A regulatory expert in the banking industry said in somerespects the cut to a 30 percent risk weighting was very welcomeas it would mean banks having to set aside less capital to coverloans to small companies.

He added, however, that some banks will feel the riskweighting is too low and will either set aside more capital,meaning the loan won't be as cheap, or not lend at all as therisk may not be worth the returns.

Figures from the Organisation for Economic Development showthat between 2007 and 2010 lending to small business not onlydeclined but that SMEs also faced higher interest rates andshorter maturities than blue chip companies.

The European Central Bank's figures from the last quarter of2011 and the first quarter of 2012 show credit lines to SMEs inthe euro area declined by 20 percent, a six percent increasesince the previous survey.

(Additional reporting by Huw Jones in London)