Keywords: Banks, Capital Requirements, SMEs, Basel II
Abstract: We examine the likely competitive effects of the proposed implementation of the Basel II
capital requirements on banks in the market for credit to SMEs in the U.S. Specifically,
we address whether reduced risk weights for SME credits extended by large banking organizations
that adopt the Advanced Internal Ratings-Based (A-IRB) approach of Basel II might significantly
adversely affect the competitive positions of organizations that do not adopt A-IRB.
The analyses suggest only a relatively minor competitive effect on the majority of community
banks primarily because the organizations that are likely to adopt A-IRB tend to make very
different types of SME loans to different types of borrowers than community banks.
However, the analyses suggest the possibility of significant adverse effects on the
competitive positions of large banking organizations that do not adopt A-IRB because
the data do not suggest any strong segmentation in SME credit markets among large organizations.
Full paper (1035 KB PDF)
This paper is also available as a Basel II White Paper
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Last update: March 15, 2004