Are capital requirements on small business loans flawed?

Dennis Bams*, Magdalena Pisa, Christian C.P. Wolff

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

We show that capital requirements on small business loans (SBL) based on Basel Committee’s Internal Ratings Based (IRB) rules are too high relative to those for corporate loans (CL), as they are not based on actual SBL data. We argue that SBL are not put on a level playing field with CL, whose requirements were calibrated on historical data. We show that such a discrepancy has real effects, as disproportionately high capital requirements are linked to lower credit availability for small businesses. In order to treat CL and SBL proportionately to their correlated credit risk, the IRB rules should require 45% lower capital requirements on the latter.
Original languageEnglish
Pages (from-to)255-274
Number of pages20
JournalJournal of Empirical Finance
Volume52
DOIs
Publication statusPublished - Jun 2019

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Capital requirements
Small business loans
Loans
Internal ratings
Discrepancy
Level playing field
Credit risk
Credit availability
Small business
Basel Committee

Cite this

Bams, Dennis ; Pisa, Magdalena ; Wolff, Christian C.P. / Are capital requirements on small business loans flawed?. In: Journal of Empirical Finance. 2019 ; Vol. 52. pp. 255-274.
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Are capital requirements on small business loans flawed? / Bams, Dennis; Pisa, Magdalena; Wolff, Christian C.P.

In: Journal of Empirical Finance, Vol. 52, 06.2019, p. 255-274.

Research output: Contribution to journalArticleAcademicpeer-review

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AB - We show that capital requirements on small business loans (SBL) based on Basel Committee’s Internal Ratings Based (IRB) rules are too high relative to those for corporate loans (CL), as they are not based on actual SBL data. We argue that SBL are not put on a level playing field with CL, whose requirements were calibrated on historical data. We show that such a discrepancy has real effects, as disproportionately high capital requirements are linked to lower credit availability for small businesses. In order to treat CL and SBL proportionately to their correlated credit risk, the IRB rules should require 45% lower capital requirements on the latter.

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