Are SME Loans Less Risky than Regulatory Capital Requirements Suggest?

Posted: 21 May 2019

See all articles by Klaus Duellmann

Klaus Duellmann

Deutsche Bundesbank

Philipp Koziol

European Central Bank (ECB)

Date Written: October 15, 2013


Our paper addresses firm size as a driver of systematic credit risk in loans to small and medium-sized enterprises (SMEs). Key contributions are the use of a unique data set of SME lending by over 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements. What sets our sample apart is its comprehensive coverage of the particularly rich and well-developed credit market for SMEs in Germany. We estimate asset correlations as the key measure of systematic risk from historical default rates. Our results suggest that systematic risk tends to increase with firm size, conditional on the respective rating category. We also compare the size of this effect with the capital relief that has been granted in Basel II for SMEs relative to large firms. Our asset correlation estimates suggest a significantly larger relative difference from the corresponding values for large firms than reflected in the regulatory capital requirements in two cases: first, for SME loans in the corporate portfolio of the Internal Ratings-Based Approach and, second, for SME loans treated under the revised standardized approach of Basel II.

Keywords: Asset Correlation, Basel II, Minimum Capital Requirements, Single Risk Factor Model

JEL Classification: G21, G33, C13

Suggested Citation

Düllmann, Klaus and Koziol, Philipp, Are SME Loans Less Risky than Regulatory Capital Requirements Suggest? (October 15, 2013). Journal of Fixed Income, Vol. 23, No. 4, 2014,, Available at SSRN: or

Klaus Düllmann

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

Philipp Koziol (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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