* 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 with countries on cutting the amount of capital banks must hold against loans to smaller companies, resolving one of several issues holding up the implementation of the Basel III capital rules in Europe, a negotiator said.
"The European Parliament managed to push through its demands that credit to small and medium-sized business will be helped by a lower risk-weighting of a third," Othmar Karas, who is leading negotiations with countries on behalf of the parliament, said on Friday.
Global regulatory standards - or Basel III - set by the Basel Bank for International Settlements asks banks to increase their capital reserves to act as a buffer against loan losses.
EU regulators have drafted their fourth Capital Requirements Directive to implement Basel III in European law, but talks have been delayed by conflicts over how to treat different types of loans made by banks.
"Now the banking regulation can contribute to financing growth and the real economy," said Karas, an Austrian lawmaker in the European Parliament.
Talks between the European Commission, country representatives and the European Parliament are set to resume next Wednesday.
Small and medium-sized businesses make up the backbone of the European economy, but their growth has slowed as banks grow increasingly reluctant to lend to them.
By changing the capital rules lawmakers make it cheaper for banks to make those loans.
A regulatory expert in the banking industry said in some respects the cut to a 30 percent risk weighting was very welcome as it would mean banks having to set aside less capital to cover loans to small companies.
He added, however, that some banks will feel the risk weighting is too low and will either set aside more capital, meaning the loan won't be as cheap, or not lend at all as the risk may not be worth the returns.
Figures from the Organisation for Economic Development show that between 2007 and 2010 lending to small business not only declined but that SMEs also faced higher interest rates and shorter maturities than blue chip companies.
The European Central Bank's figures from the last quarter of 2011 and the first quarter of 2012 show credit lines to SMEs in the euro area declined by 20 percent, a six percent increase since the previous survey.
(Additional reporting by Huw Jones in London)
Keywords: EU CAPITALREQUIREMENTS