The impact of Basel II on the debt costs of German SMEs

Abstract

We investigate the ex-post effects of the Basel II reform on the debt costs of German small and medium-sized enterprises (SMEs). We assume that Basel II formalized the credit assessment procedure of banks and that especially SMEs might face higher costs of debt as they tend to have comparably high proportions of bank credit, and consequently lower ratings than bigger companies. Beyond that, banks might try to refinance those additional rating costs by imposing higher interest rates on debtors. The results presented in our paper indicate a significant overall rise of debt costs of SMEs that have debt relations with IRBA-certified banks since 2007. Furthermore, low-risk companies benefit from comparably lower loan rates, whereas risky firms face comparably higher loan costs than before. The results are less obvious for SMEs that are rated under RSA, but still present for highly risky companies. We test for several influences of the financial crisis. However, we do not find convincing arguments that would reason a rise of the costs of debt in regard of the crisis. Yet, we still observe higher debt costs of SMEs, particularly of highly risky companies, since 2007 that indicate a change of bank lending behavior in Germany.

The emergence of the global fintech market: economic and technological determinants

“…The financial crisis also increased the cost of debt for many small firms, and in some cases banks stopped lending money to businesses altogether, forcing them to contend with refusals on credit lines or bank loans (Schindele and Szczesny 2016;Lopez de Silanes et al 2015). Fintech startups in the area of crowdlending, crowdfunding, and factoring aim to fill this gap.…”

“…Fintech startup formations in the financing category might have emerged for multiple reasons, two of which could be the traditional funding gap that small firms around the globe face (Schindele and Szczesny 2016) and funding constraints potentially due to more stringent banking regulations in the aftermath of the latest financial crisis (Campello et al 2010; European Central Bank 2013; European Banking Authority 2015). Consequently, promoting fintechs from the financing category through regulatory sandboxes and other policy measures could be an effective way to close the funding gap of small firms.…”

German Mittelstand bonds: yield spreads and liquidity

“…As a result, the interest rates offered to low-rated firms have increased significantly because of higher equity requirements for such loans (Müller et al 2011;Schindele and Szczesny 2015). Mittelstand firms are affected in particular by these adverse conditions due to their relatively low equity ratios compared to large firms (Feiler and Kirstein 2014).…”

“…It is characterized by being mostly medium-sized, family-owned, and family-run companies, which traditionally lend through relationship banking to cover their financing needs. However, with the phase-in of the Basel II regulations, financing via relationship banking has become more restrictive for many Mittelstand firms, as the new regulations enforce a mandatory rating for all issued loans (Schindele and Szczesny 2015). Launched in 2010, the possibility to issue Mittelstand bonds with volumes of less than 100 million Euro on the capital market is a remedy for the Mittelstand to close this financing gap.…”

The implication of banking regulation on bank business model: evidence from the ASEAN countries

“…The previous studies on the impact of the implementation of Basel II focus on the procyclicality effects (Gordy and Howells, 2006;Heid, 2007;Saurina and Trucharte, 2007;Repullo et al, 2010;Andersen, 2011;Agénor and Pereira Da Silva, 2012), loan-loss provision (Cummings and Durrani, 2016;Hamadi et al, 2016), loan pricing (Saurina and Trucharte, 2004;Ruthenberg and Landskroner, 2008;Schindele and Szczesny, 2016) financial stability (Kupiec, 2007) or Islamic banking industries (Zins and Weill, 2017). However, there is a lack on literature that evaluates the impact of Basel II on bank business models specifically in emerging markets.…”