When is a Supervisory Recognized External Rating Worthwhile for a Medium-Sized Enterprise and its Bank? – An Empirical Analysis Against the Background of Basel III

International Review of Applied Financial Issues and Economics, 4 (3), 09/2012

19 Pages Posted: 29 Apr 2012 Last revised: 11 Feb 2014

See all articles by Stefan Stein

Stefan Stein

University of Bochum - Department of Finance and Banking

Daniel Kaltofen

Ruhr University of Bochum - Faculty of Economics; BiTS Business and Information Technology School

Date Written: April 29, 2012

Abstract

In Germany, more than 95% of the credit institutions report their regulatory capital requirements for counterparty risk by means of the credit risk standardized approach (CRSA) instead of the more sophisticated internal rating based approach (IRBA). Though the CRSA allows a partially risk sensitive calculation of the banks’ regulatory capital German CRSA-banks cannot benefit from this provision as only around 100 non-financial companies have the required published agency rating on hand. We examine, whether the upcoming re-regulation of the banking business Basel III is a driver for both CRSA-banks and their preponderantly medium-sized corporate borrowers to push the use of external corporate ratings. Evaluating a unique sample of 26,025 data sets of German medium-sized companies, we find that under the provisions of Basel III CRSA-banks may experience only minor savings of about 0.5 billion euros in their regulatory capital if their corporate customers had a supervisory recognized rating available. Projected to the total population of German corporates, the exposures of around 9,000 of them potentially qualify for lower risk weights within the CRSA, while estimated 200 are eligible for financial benefits that match or even overcompensate the incurred costs of an external rating. Respectively, for the majority of German companies the benefits of such ratings rather reflect improvements in strategic management issues than lower financing costs.

Keywords: Basel III, banking regulation, ratings, credit risk standardized approach, SME

JEL Classification: G21, G28, G24, G32

Suggested Citation

Stein, Stefan and Kaltofen, Daniel and Kaltofen, Daniel, When is a Supervisory Recognized External Rating Worthwhile for a Medium-Sized Enterprise and its Bank? – An Empirical Analysis Against the Background of Basel III (April 29, 2012). International Review of Applied Financial Issues and Economics, 4 (3), 09/2012, Available at SSRN: https://ssrn.com/abstract=2047649 or http://dx.doi.org/10.2139/ssrn.2047649

Stefan Stein (Contact Author)

University of Bochum - Department of Finance and Banking ( email )

Bochum, DE 44780
Germany

Daniel Kaltofen

BiTS Business and Information Technology School ( email )

Reiterweg 26b
Iserlohn, D-58636
Germany

Ruhr University of Bochum - Faculty of Economics ( email )

Ruhr University of Bochum
Faculty of Economics
Bochum, DE 44780
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
135
Abstract Views
1,017
rank
270,185
PlumX Metrics