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Lower bank capital requirements as a policy tool to support credit to SMEs: evidence from a policy experiment

Sandrine Lecarpentier, Mathias Lé, Henri Fraisse and Michel Dietsch

No 2019-12, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our differences-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply.

Keywords: SME finance; Credit supply; Basel III; Credit risk modelling; SME Supporting Factor (search for similar items in EconPapers)
JEL-codes: C13 G21 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-eec, nep-ent, nep-rmg and nep-sbm
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2019-12

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