Are capital requirements on small business loans flawed?

Dennis Bams, Magdalena Pisa and Christian Wolff

Journal of Empirical Finance, 2019, vol. 52, issue C, 255-274

Abstract: We show that capital requirements on small business loans (SBL) based on Basel Committee’s Internal Ratings Based (IRB) rules are too high relative to those for corporate loans (CL), as they are not based on actual SBL data. We argue that SBL are not put on a level playing field with CL, whose requirements were calibrated on historical data. We show that such a discrepancy has real effects, as disproportionately high capital requirements are linked to lower credit availability for small businesses. In order to treat CL and SBL proportionately to their correlated credit risk, the IRB rules should require 45% lower capital requirements on the latter.

Keywords: Small business credit risk; IRB capital requirements; Asset correlations; Lending regulation (search for similar items in EconPapers)
JEL-codes: C51 G2 G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:52:y:2019:i:c:p:255-274

DOI: 10.1016/j.jempfin.2019.05.001

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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