Effects of the New Basel Capital Accord on Bank Capital Requirements for SMEs

by Edward I. Altman of New York University, and
Gabriele Sabato of the University of Rome "La Sapienza"

October 2005

Abstract: Using data from three countries (US, Italy and Australia) and surveying related studies from several other countries in Europe, we investigate the effects of the New Basel Capital Accord on bank capital requirements for small and medium sized enterprises (SMEs). We find that, for all the countries, banks will have significant benefits, in terms of lower capital requirements, when considering small and medium sized firms as retail customers. But they will be obliged to use the Advanced IRB approach and to manage them on a pooled basis. For SMEs as corporates, however, capital requirements will be slightly greater than under the existing Basel I Capital Accord. We believe that most eligible banks will use a blended approach (considering some SMEs as retail and some as corporate). Through a breakeven analysis, we find that for all of our countries, banking organizations will be obliged to classify as retail at least 20% of their SME portfolio in order to maintain the current capital requirement (8%).

JEL Classification: G21, G28.

Keywords: SME finance, Basel II, bank capital requirements, retail banking.

Published in: Journal of Financial Services Research, Vol. 28, No. 1-3. (October 2005), pp. 15-42.

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