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

Author

Listed:
  • Casasola, María José
  • Trujillo Ponce, Antonio
  • Cardone Riportella, Clara

Abstract

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

Suggested Citation

  • Casasola, María José & Trujillo Ponce, Antonio & Cardone Riportella, Clara, 2008. "Credit risk mitigation and SMEs bank financing in Basel II : the case of the Loan Guarantee Associations," DEE - Working Papers. Business Economics. WB wb084011, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
  • Handle: RePEc:cte:wbrepe:wb084011
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    References listed on IDEAS

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    1. Samartín Sáenz, Margarita & Casasola, María José & Cardone Riportella, Clara, 2005. "Do banking relationships improve credit conditions for Spanish SMEs?," DEE - Working Papers. Business Economics. WB wb052806, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    2. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
    3. 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.
    4. Bindseil, Ulrich & Papadia, Francesco, 2006. "Credit risk mitigation in central bank operations and its effects on financial markets: the case of the Eurosystem," Occasional Paper Series 49, European Central Bank.
    5. 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.
    6. Kerkhof, Jeroen & Melenberg, Bertrand, 2004. "Backtesting for risk-based regulatory capital," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1845-1865, August.
    7. Lindquist, Kjersti-Gro, 2004. "Banks' buffer capital: how important is risk," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 493-513, April.
    8. Trujillo Ponce, Antonio & Cardone Riportella, Clara, 2006. "Efectos del aval de las SGRs en la financiación de las PYME y los requerimientos de capital de Basilea II," DEE - Documentos de Trabajo. Economía de la Empresa. DB db060302, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
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    10. Jesús Saurina & Carlos Trucharte, 2004. "The Impact of Basel II on Lending to Small- and Medium-Sized Firms: A Regulatory Policy Assessment Based on Spanish Credit Register Data," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 121-144, October.
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    Cited by:

    1. Busetta, Giovanni & Zazzaro, Alberto, 2012. "Mutual loan-guarantee societies in monopolistic credit markets with adverse selection," Journal of Financial Stability, Elsevier, vol. 8(1), pages 15-24.

    More about this item

    Keywords

    Credit risk mitigation;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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