The following MBA-Thesis analyses how the financial crisis has affected different pre-conditions for the credit lending behaviour of banks. Additionally the demand for loans of potential borrowers will be considered. A “credit crunch” is defined as a restriction of the credit supply which leads to a mismatch of supply and demand.
It will be shown that the financial crisis caused a still ongoing macroeconomic contraction. The macroeconomic contraction has a direct effect on the calculation of rating grades which downgrade. Parameters of credit risk assessments will be analysed and their pro-cyclicality will be tested. Corporate rating grades already downgraded significantly in 2008.
The downgrading of firms has an effect on the credit pricing which influences also the credit demand. This effect will be shown by explaining a basic cost-plus loan pricing model. The sensitivity of the loan pricing towards changes of attributed capital, refinancing costs and cost of default will be exemplarily shown. It will be shown that the rating downgrades have a significant effect on the credit price. This price increase which might affect the demand is however per definition not a “credit crunch”.
The Basel II Accord regulation links the requirements for banks’ capital to rating grades. Prior to the financial crisis the capital of banks has already been close to the regulatory minimum level. This made the banks vulnerable for impairments on assets. As new sources for capitalisation and possibilities to off-balance assets are currently limited banks have to reduce risk-weighted assets to fulfil the minimum capital requirements.
A reduction of risk-weighted assets could be inter alia done by a restrictive corporate lending policy. The restrictions on banks’ capital will not decrease quickly as especially impairments on the credit book might increase due to upcoming defaults.
Nevertheless a supply restriction gets only visible if the demand for credits is robust. The demand correlates among other points especially to the investments which have decreased since the end of 2008.
Table of Contents
1 Introduction
1.1 Description of the problem and course of the thesis
1.2 Framework
1.2.1 Financial Crisis
1.2.2 Credit Rationing and IS-LM as theoretical models
1.2.3 Small and Medium-Sized Enterprises in Germany
1.2.4 German Credit Banking System
2 Impacts on the corporate credit demand and supply
2.1 Demand Side
2.1.1 Basel 2, Ratings and Required Capital Attribution
2.1.2 Macroeconomic Contraction and Development of Ratings
2.1.3 Macroeconomic Contraction and Borrowers’ Balance Sheets
2.1.4 Other Factors that Influence - a Loan Pricing Model
2.2 Supply Side
2.2.1 Available Economic Capital
2.2.2 Securization of Bank Loans
2.2.3 Alternative Demand and Monetary Policy
3 Evidence of a credit crunch in Germany
3.1 Development of the total lending volume in Germany
3.2 Analysis on the basis of the ECB Bank Lending Survey
4 Conclusion
Objectives and Research Themes
This thesis examines whether the financial crisis has induced a credit crunch for small and medium-sized enterprises (SME) in Germany, exploring the interplay between macroeconomic contraction, bank lending behavior, and regulatory capital requirements.
- Analysis of the credit demand and supply factors for German SMEs.
- Evaluation of the impact of Basel II regulations on credit pricing and availability.
- Investigation of how rating migrations during economic downturns affect capital allocation.
- Assessment of the role of bank refinancing conditions and capital constraints during the 2008 financial crisis.
Excerpt from the book
1.1 Description of the problem and course of the thesis
“The Financial Crisis has hit the German „Mittelstand“. One out of five entrepreneurs is facing a credit crunch” or as Kindleberger calls it “the damp squid might have hit Z”. Anecdotal evidence exists that even good firms are finding it nowadays difficult to obtain credit to finance production and investment. However empirical data do not unequivocally support the assertion that a credit crunch is occurring. Has the current financial crisis induced a credit crunch for German Small and Medium-Sized Enterprises (SME) till now or will it do it in future? This question will be therefore analysed and possible future developments will be discussed in this thesis.
With 25.5% equity SME are historically dependent on the availability of debt financing. Further on they play with a share of 99.7% of all firms in Germany, with 40.8 % of total German taxable turnover and 70.5% of the total employees in Germany an important role in the economy.
The phenomenon of credit crunch means a mismatch of credit demand and supply or better an over exceeding demand compared to the level of supply. For this thesis the most commonly shared definition of Bernanke et al is chosen which defines a credit crunch “as a significant leftward shift in the supply curve for bank loans, holding constant both the safe real interest rate and the quality of potential borrowers.”
Summary of Chapters
1 Introduction: Introduces the research question regarding a potential credit crunch for German SMEs and defines the theoretical framework and definitions used throughout the study.
2 Impacts on the corporate credit demand and supply: Investigates demand-side factors like Basel II rating impacts and supply-side constraints, including capital adequacy and refinancing costs.
3 Evidence of a credit crunch in Germany: Examines empirical data on lending volumes and the ECB Bank Lending Survey to assess whether a systemic credit crunch occurred in Germany.
4 Conclusion: Summarizes the findings, concluding that while lending conditions tightened, the evidence does not support the existence of a definitive credit crunch, pointing instead to systematic cyclical risks.
Keywords
Credit crunch, SME, Germany, Basel II, Financial crisis, Credit rationing, Bank capital, Loan pricing, Economic contraction, Ratings, Lending volume, ECB, Financial intermediation, Risk management, SME finance
Frequently Asked Questions
What is the fundamental objective of this thesis?
The thesis aims to determine whether the financial crisis that began in 2007 has induced a genuine credit crunch for German small and medium-sized enterprises or if the observed tightening is a result of other factors.
What are the central thematic areas?
The core themes include the impact of Basel II on bank capital requirements, the relationship between macroeconomic cycles and firm credit ratings, and the influence of banking system liquidity on credit supply.
What is the primary research question?
The primary research question is: Has the current financial crisis induced a credit crunch for German Small and Medium-Sized Enterprises (SME) to date, or will it do so in the future?
Which scientific methods are utilized?
The author utilizes a combination of theoretical economic models (IS-LM, Stiglitz-Weiss credit rationing, and cost-plus loan pricing) alongside an empirical analysis of lending statistics, ECB survey data, and financial performance data of major German banks.
What is covered in the main section of the work?
The main section analyzes credit demand and supply dynamics, specifically exploring how rating downgrades due to economic contraction increase the cost of capital, and how banks manage their risk-weighted assets.
Which keywords characterize the work?
The work is characterized by terms such as Credit Crunch, Basel II, SME, Risk-Weighted Assets (RWA), Credit Rationing, and Bank Capitalization.
How does Basel II influence SME lending according to the author?
The author argues that Basel II makes the banking system more risk-sensitive, which can lead to pro-cyclical behavior: as firm ratings worsen during a recession, the cost of borrowing increases, potentially restricting credit even for fundamentally viable firms.
What is the "Hausbank" principle mentioned in the text?
The "Hausbank" principle refers to the long-term, close relationship between German SMEs and their primary banks, which helps reduce information asymmetry and provides a degree of stability for the borrower during economic stress.
What is the role of the SOFFIN and the "Bad Bank" model?
These are presented as state-led interventions designed to stabilize the banking sector by providing capital injections and a framework to manage "toxic" or illiquid assets, thereby preventing a total collapse of credit supply.
Does the author conclude that a credit crunch occurred?
The author concludes that while there was a significant "temporary mismatch" and tightening of conditions, the evidence does not meet the strict economic definition of a permanent or long-term credit crunch in Germany.
- Quote paper
- Christopher Heine (Author), 2009, Has the Financial Crisis Induced a Credit Crunch for Small and Medium-Sized Enterprises in Germany?, Munich, GRIN Verlag, https://www.grin.com/document/132485
