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Evaluation of minimum capital requirements for bank loans to SMEs

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  • Düllmann, Klaus
  • Koziol, Philipp

Abstract

Our paper addresses firm size as a driver of systematic credit risk in loans to small and medium enterprises (SMEs). Key contributions are the use of a unique data set of SME lending by over 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements. What sets our sample apart is its comprehensive coverage of the particularly rich and well developed credit market for SMEs in Germany. We estimate asset correlations as the key measure of systematic risk from historical default rates. Our results suggest that systematic risk tends to increase with firm size, conditional on the respective rating category. We also compare the size of this effect with the capital relief that has been granted in Basel II for SMEs relative to large firms. For SME loans in the corporate portfolio of the Internal Ratings-Based Approach and also for SME loans treated under the revised standardized approach of Basel II, our asset correlation estimates suggest a significantly larger relative difference from large firms than reflected in the regulatory capital requirements.

Suggested Citation

  • Düllmann, Klaus & Koziol, Philipp, 2013. "Evaluation of minimum capital requirements for bank loans to SMEs," Discussion Papers 22/2013, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:222013
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    References listed on IDEAS

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    1. Michel Dietsch, 2004. "Should SME exposures be treated as retail or corporate exposures: a comparative analysis of probabilities of default and assets correlations in French and German SMEs," ULB Institutional Repository 2013/14164, ULB -- Universite Libre de Bruxelles.
    2. Lopez, Jose A., 2004. "The empirical relationship between average asset correlation, firm probability of default, and asset size," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 265-283, April.
    3. Dietsch, Michel & Petey, Joel, 2002. "The credit risk in SME loans portfolios: Modeling issues, pricing, and capital requirements," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 303-322, March.
    4. Klaus Duellmann & Jonathan Küll & Michael Kunisch, 2010. "Estimating asset correlations from stock prices or default rates - which method is superior?," Post-Print hal-00736734, HAL.
    5. Magdalena Pisa & Dennis Bams & Christian Wolff, 2012. "Modeling default correlation in a US retail loan portfolio," LSF Research Working Paper Series 12-19, Luxembourg School of Finance, University of Luxembourg.
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    7. Petr Jakubík, 2006. "Does Credit Risk Vary with Economic Cycles? The Case of Finland," Working Papers IES 2006/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2006.
    8. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    9. Dietsch, Michel & Petey, Joel, 2004. "Should SME exposures be treated as retail or corporate exposures? A comparative analysis of default probabilities and asset correlations in French and German SMEs," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 773-788, April.
    10. Lee, Shih-Cheng & Lin, Chien-Ting & Yang, Chih-Kai, 2011. "The asymmetric behavior and procyclical impact of asset correlations," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2559-2568, October.
    11. Lutz Hahnenstein, 2004. "Calibrating the CreditMetrics™ correlation concept — Empirical evidence from Germany," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 18(4), pages 358-381, December.
    12. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    13. Takashi Hashimoto, 2009. "Asset correlation for credit risk analysis -- Empirical study of default data for Japanese companies --," Bank of Japan Working Paper Series 09-E-3, Bank of Japan.
    14. Duellmann, Klaus & Küll, Jonathan & Kunisch, Michael, 2010. "Estimating asset correlations from stock prices or default rates--Which method is superior?," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2341-2357, November.
    15. Magdalena Pisa & Dennis Bams & Christian Wolff, 2012. "Modeling default correlation in a US retail loan portfolio," DEM Discussion Paper Series 12-19, Department of Economics at the University of Luxembourg.
    16. Rösch, Daniel, 2003. "Correlations and Business Cycles of Credit Risk: Evidence from Bankruptcies in Germany," University of Regensburg Working Papers in Business, Economics and Management Information Systems 380, University of Regensburg, Department of Economics.
    17. Hamerle, Alfred & Liebig, Thilo & Rösch, Daniel, 2003. "Credit Risk Factor Modeling and the Basel II IRB Approach," Discussion Paper Series 2: Banking and Financial Studies 2003,02, Deutsche Bundesbank.
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    Cited by:

    1. Christoph Wunderer, 2017. "Asset correlation estimation for inhomogeneous exposure pools," Papers 1701.02028, arXiv.org, revised Sep 2019.
    2. ., 2014. "The concluding panel discussion," Chapters, in: Sajid M. Chaudhry & Andrew W Mullineux (ed.), Taxing Banks Fairly, chapter 10, pages 181-188, Edward Elgar Publishing.
    3. Jaehoon Hahn & Ho-Seong Moon, 2016. "Credit Cycle and the Macroeconomy: Empirical Evidence from Korea," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 22(4), pages 76-108, December.
    4. Sajid M. Chaudhry & Andrew W Mullineux (ed.), 2014. "Taxing Banks Fairly," Books, Edward Elgar Publishing, number 15860.
    5. M. Dietsch & K. Düllmann & H. Fraisse & P. Koziol & C. Ott, 2016. "Support for the SME Supporting Factor - Multi-country empirical evidence on systematic risk factor for SME loans," Débats économiques et financiers 23, Banque de France.

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    More about this item

    Keywords

    Asset Correlation; Basel II; Minimum Capital Requirements; Single Risk Factor Model;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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