Are Capital Requirements on Small Business Loans Flawed?
53 Pages Posted: 9 Aug 2012 Last revised: 13 Aug 2023
There are 2 versions of this paper
Are Capital Requirements on Small Business Loans Flawed?
Are Capital Requirements on Small Business Loans Flawed?
Date Written: November 5, 2018
Abstract
We explore an inconsistency in the Basel Committee’s Internal Ratings Based (IRB) rules: the IRB rules on corporate loans were calibrated to loan-level data, while the IRB rules on small business loans were calibrated with little, if any, information on small business loans. We argue that the resulting IRB rules do not put small business and corporate loans on a level playing field. In order to treat both asset classes – small business and corporate loans – proportionately to their correlated credit risk, the IRB rules should require 45% lower capital requirements for small business loans than what the Basel Committee currently prescribes. This lowering of capital requirements on small business loans goes in the same direction as the SME Support Factor introduced by the European Commission in the current installment of the Basel regulation.
Keywords: Small business credit risk, capital charges, default correlation, factor models
JEL Classification: C51, G32, E44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Default Risk in Equity Returns
By Maria Vassalou and Yuhang Xing
-
News Related to Future GDP Growth as a Risk Factor in Equity Returns
-
News Related to Future GDP Growth as Risk Factors in Equity Returns
-
By John Y. Campbell, Jens Hilscher, ...
-
By John Y. Campbell, Jens Hilscher, ...
-
Forecasting Default with the Kmv-Merton Model
By Sreedhar T. Bharath and Tyler Shumway
-
Exchange Rate and Foreign Inflation Risk Premiums in Global Equity Returns
-
By Maria Vassalou and Yuhang Xing
-
Bankruptcy Prediction With Industry Effects
By Sudheer Chava and Robert A. Jarrow