Lower Bank Capital Requirements as a Policy Tool to Support Credit to SMEs: Evidence From a Policy Experiment?

45 Pages Posted: 25 Jan 2021

See all articles by Michel Dietsch

Michel Dietsch

Institut d'Etudes Politiques

Henri Fraisse

Banque de France - Autorité de contrôle Prudentiel

Mathias LÉ

Banque de France

Sandrine Lecarpentier

Banque de France

Date Written: December 1, 2020

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 difference-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, Capital requirement

JEL Classification: C13, G21, G33

Suggested Citation

Dietsch, Michel and Fraisse, Henri and LÉ, Mathias and Lecarpentier, Sandrine, Lower Bank Capital Requirements as a Policy Tool to Support Credit to SMEs: Evidence From a Policy Experiment? (December 1, 2020). Banque de France Working Paper No. 789, Available at SSRN: https://ssrn.com/abstract=3771271 or http://dx.doi.org/10.2139/ssrn.3771271

Michel Dietsch

Institut d'Etudes Politiques

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

Henri Fraisse (Contact Author)

Banque de France - Autorité de contrôle Prudentiel ( email )

61, rue Taitbout
Paris, 75436
France

Mathias LÉ

Banque de France ( email )

Paris
France

HOME PAGE: http://https://sites.google.com/site/mathiasle/home

Sandrine Lecarpentier

Banque de France ( email )

Paris
France

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