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

Clara Cardone Riportella, Antonio Trujillo Ponce and María José Casasola
Authors registered in the RePEc Author Service: Antonio Trujillo-Ponce

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

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

Keywords: Credit; risk; mitigation; Bank; financing; of; SMEs; Basel; II; Loan; Guarantee; Association (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-ban, nep-eec, nep-reg and nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:wb084011

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