What do Basel Capital Accords mean for SMEs?

CLARA CARDONE RIPORTELLA; ANTONIO TRUJILLO PONCE; ANAHÍ BRIOZZO

Rio de Janeiro

Congreso; 35th ANPAD Meeting; 2011

ANPAD

In 2010 the Basel Committee on Banking Supervision (BCBS) agreed newinternational banking guidelines as a response to the financial crisis of 2008. This newAccord, known as Basel III, tries to achieve financial stability and strengthen the solvency ofbanks and liquidity without diminishing the flow of money from the credit market. Withinthis context, this paper analyses the impact of new Basel Accords (Basel II and III) on bankcapital requirements for Small and Medium-sized Enterprises (SMEs) when the internalratings-based (IRB) approach is used. To do this, we develop a rating system for SpanishSMEs. To compute bank capital requirements we identify risk rating classes using thepredicted probability of default (PD) through a logit model. In order to estimate one year ofPDs, we use the Sistema de Análisis de Balance Ibéricos (SABI) database for Spanish firms.The final sample (defaulted and active firms) is obtained using a methodology similar toAltman and Sabato (2007), which considers for each year of the sample a ratio of defaulted tototal firms equal to a prior probability of default. Our sample contains 489 defaulted firms and8,994 active firms. Our paper complements the previous literature by using the SABI databasewith information “from the demand-side” of the credit market, and by considering a relevantperiod, from 2005 to 2009, which could be considered as an economic cycle. We alsoexamine the effect on the credit risk premium charged by banks of the guarantee offered by aLoan Guarantee Association (LGA) to an SME; and whether this foreseeable decrease in theinterest rate applicable to the SME’s loan is compensated by the cost of this guarantee. Theapplication of Basel II and Basel III Capital Accords have important consequences for banks,SME borrowers, and LGAs, which are financial intermediaries whose importance isincreasing and which appear, practically, all over the countries in the European Union. Forbanks, the new banking regulation means working in a more stable financial environment. ForSMEs, the Capital Accords mean the payment of premiums according to the risk of theirbusiness initiatives. In the past, the alternative involved restrictions in their access to credit,arising specifically from the difficulty that calibrating that risk presented for the banks. At thesame time, the SMEs need to be instructed in the management of risk, knowing that the lenderwill assess them in that respect. Finally, in the face of the challenge of Basel Accords, theLGAs must accept that, like the SMEs they guarantee, they may need to submit themselves tothe same processes of measurement of risk as those to which their associates are submitted,i.e., at a credit rating.