Credit risk mitigation and SMEs bank financing in Basel II : the case of the Loan Guarantee Associations

The objective of this paper is to analyse the impact of the techniques foreseen in the Basel Agreement II (BII) for mitigating the risk of default on bank loans to small and medium enterprises (SMEs). In particular, we will conduct an analysis of the effect of the guarantees that the Loan Guarantee Association (LGA) offer to the SMEs on the assignment of capital requirements of the financial entities under BII. At the same time, the study will examine the effect of this guarantee on the credit risk premium that the financial entities should charge their clients, and whether this foreseeable decrease in the interest rates applicable to the SMEs is compensated by the cost of the guarantee. The results show that, considering that the cost of the LGA guarantee in Spain is around 0.68%, it will be advantageous for an SME with the annual sales of less than or equal to €5 million to request this guarantee whenever the probability of default (PD) of the LGA is <1.1%, if the approach utilised by the financial entity is the Internal Ratings-Based (IRB) and the SME is considered as corporate; however, if the SME is included in a regulatory retail portfolio, then the limit for the PD of the LGA decreases to 0.71%. On the other hand, when the approach utilised is the Standardised one, then will be profitable for an SME treated as retail to request this guarantee whenever the PD of the LGA is <3.35% (3.95% for corporate exposures)

What do Basel Capital Accords mean for SMEs?

This paper analyses the impact of the new Basel Capital Accords (Basel II and Basel III) on the bank’s capital requirements in a portfolio of Small and Medium-sized Enterprises (SMEs) when the internal ratings-based (IRB) approach is used. To do this, the study uses a large database of Spanish firms and covers the period from 2005 to 2009. We also examine the effect on the credit risk premium charged by banks of the guarantee offered by a Loan Guarantee Association (LGA) to a SME; and whether this foreseeable decrease in the interest rates applicable to the SME is compensated by the cost of this guaranteeBank capital requirements, Credit risk mitigation, Bank financing of SMEs, Basel II, Basel III Loan Guarantee Association

A factor analysis approch to measuring European loan and bond market integration

By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time

Studies On The Potential Impacts Of The New Basel Capital Accord

In April 2003, the Basel Committee on Banking Supervision published the third consultative paper (CP3) of the new Basel Capital Accord relating to the prudential regulation of banks, which was followed in July 2003 by the EU Commission’s draft directive with the same contents, but slightly different detailed rules (Capital Adequacy Directive, CAD3). During the consultative process both organisations expect comments from the players affected by the new capital regulation, thus from the central banks of each country as well. The significance of the new capital regulation is underlined by the fact that the Basel recommendation will soon be followed by the European Union’s directive (presumably in 2004), the implementation of which will be one of the largest regulative challenges for Hungary. Accordingly, the Magyar Nemzeti Bank pays special attention to preparing the implementation of the Basel II/CAD3 capital accords, laying the groundwork for the adaptation and carrying out the necessary background analyses. Our main objective in the first phase of this rather complex and far-reaching project was – through participation in the legislative process – to analyse the issues important and relevant for the MNB, as well as to assess the potential consequences of implementation in Hungary. During such analyses we focused on the macro-prudential consequences. Accordingly, we carried out a detailed assessment of five topics.Basel Capital Accord, Pro-cyclicality, Credit risk, Market Risk, Regulation, Corporate governance.

Banking consolidation and small businessfinance: empirical evidence for Germany

Since the early 1990s an unprecedented process of consolidation has taken place in the banking sector in most industrialised countries raising concern of policymakers that it may reduce access to credit for the small business sector. While most of the existing empirical studies have focused on the U.S., this paper is the first one empirically investigating the effects of banking consolidation in Germany. As small and medium sized German companies traditionally almost exclusively rely on bank credit and as they represent the vast majority of the corporate sector reduced credit availability for those companies could particularly endanger economic growth. Based on an exceptional panel dataset comprising merged data of the German credit register and balance sheet data of German firms and banks we find - contrary to public fear - that the ongoing banking consolidation in Germany does not have a significant negative impact on the financing of small and medium-sized enterprises (SME). We measure the financing opportunities of SMEs based on the bank debt/assets ratio and the logarithmized credit size and control both explicitly for bank mergers and for the increase in the average bank size in the course of the consolidation process. In addition, we observe that the concentration in the banking market is insignificant for SME financing and that there is no significant difference between commercial banks, savings banks and private banks. --Banking consolidation,bank mergers,SME financing

Are There Canada-U.S. Differences in SME Financing?

Previous surveys of Canadian and U.S. business owners suggest that access to financing in Canada may be more problematic than in the United States. Using the 2003 Survey of Small Business Financing in the United States and the 2004 Survey on Financing of Small and Medium Enterprises in Canada, this paper examines whether this perception can be better quantified. Compared to U.S. SMEs, Canadian SMEs are found to have greater reliance on loans from individuals (family, friends and others) and less reliance on loans from financial institutions. This result can be interpreted either as indicative of lower availability of formal credit in Canada, or a lower need for formal credit. Furthermore, while evidence validating the perception that Canadian financial institutions are less likely to approve loan application of risky SMEs cannot be found, there is evidence that supports the notion that Canadian financial institutions are following a more uniform pricing policy than U.S. financial institutions.Financial services

Empirical risk analysis of pension insurance: the case of Germany

With this paper we seek to contribute to the literature on pension insurance systems. The financial literature tends to focus exclusively on the US pension insurance system. This is the first major empirical study to address the German occupational pension insurance (PSVaG) plan in Germany. The study is based on a Merton-type one-factor model, in which we determine the credit portfolio risk profile of the occupational pension insurance plan and compare two alternative pricing plans. We find that there is a low, yet non-negligible risk of very high losses that may threaten the existence of the occupational pension insurance plan (PSVaG). While relating risk premiums to firms' default probabilities would cause them to diverge widely, a marginal risk contribution method would produce less pronounced differences compared to the current, uniform pricing plan. --Pension insurance,Risk-adjusted premiums,Credit portfolio risk

A factor analysis approch to measuring European loan and bond market integration

By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time.financial market integration; corporate loan; corporate bond; panel unit root test; factor analysis

Monitoring pro-cyclicality under the capital requirements directive : preliminary concepts for developing a framework

This paper provides an overview of the questions that will need to be addressed in order to determine whether increased cyclicality in capital requirements will exacerbate the pro-cyclicality in the financial system. Many central banks have raised concerns about the potential cost of procyclicality that could come with the Basel II framework, which will be implemented in the EU via the Capital Requirements Directive (CRD). Previous capital adequacy rules required banks to hold a minimum amount of capital for each loan, regardless of the different risks involved. The main objective of the Basel II framework/CRD is to make capital requirements more risk-sensitive. Therefore, by construction, the capital requirements under the CRD will be more cyclical than under the previous rules. This raises two questions. First, does it matter whether regulatory capital requirements fluctuate more than before if banks’ (lending) behaviour is driven by other capital considerations (for example economic capital) ? Second, if it does matter, what impact will this have on the economic cycle?Basel II/CRD, pro-cyclicality