The Impact of Basel II on Small and Medium sized Enterprises in Germany

Bachelor Thesis , 2004 , 66 Pages , Grade: 1,7 (B+ 68%)

Business economics - Banking, Stock Exchanges, Insurance, Accounting

This dissertation examines the current discussion about the introduction of the New Basel Capital Accord and the impact it will have on Small and Medium sized Enterprises in Germany. SMEs or the ‘Mittelstand’ are the carrying pillar for the German economy: 20 million employees work for SMEs and produce a value added subject to VAT of 49% of the German economy. These establishments are not only innovative and progressive in the way they conduct their business; its owners and managers are also an important factor for the aggregate demand in Germany. With reflection on the requirements of Basel II the major weaknesses of SMEs are revealed: their provision with own funds is traditionally low compared to large companies and bank loans present a main source of debt finance. Minimum capital requirements are an essential part of banking supervision and banking regulation and help ensuring the financial stability of an economy. Financial stability is vital for a country because it helps to absorb losses and protects consumers from the loss of their investments. This was not so in Thailand when the Asian Crisis started in 1997. One reason for the Asian Crisis, among others, was inadequate banking supervision.

The Basel Committee has produced a set of minimum requirements for effective banking supervision which can be applied to every country. The so called ‘1988 Accord’ or ‘Basel I’ is currently being modified into ‘Basel II’ and likely to be introduced in the beginning of 2007. This paper is mainly concerned with the change in the calculation of minimum capital requirements (MCR), i.e. how much capital credit institutes put aside as a cushion against future losses. The main impact of Basel II on SMEs in Germany is that the future calculations of the MRC will depend on the company’s individual solvency and not on a fixed percentage of a loan.

Inhaltsverzeichnis (Table of Contents)

• Introduction
  • The current problem and the papers objectives
  • Methodology
• Small and Medium Sized Enterprises in Germany
  • The qualitative aspect
  • The quantitative aspect
  • The economic importance of SMEs in Germany
  • How do SMEs fund their investments?
  • What is their capital structure like?
• Banking regulation and the Basel Accords
  • Regulation and banking supervision
    • Why regulate financial Markets
    • Exhibit: The Asia Crisis
  • From Basel I to Basel II
  • The Basel Committee and its first Capital Accord
  • The current accord's weaknesses and consequences
  • The New Basel Capital Accord
  • Two options for a bank's credit risk calculation
    • The Standardised Approach
    • Internal Ratings-Based Approach
• Rating
  • Definition
  • External rating: importance, agencies, procedures & notations
  • Internal ratings: procedure, example & importance
  • Impact on the rating grades on terms and conditions of loans
  • Impact on SMEs, how well are they prepared for rating?
• Conclusion
  • Consequences and scenarios
  • Outlook for the future

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This dissertation examines the impact of the New Basel Capital Accord on small and medium-sized enterprises (SMEs) in Germany. It aims to highlight the challenges and opportunities that this regulatory change poses for SMEs, which play a significant role in the German economy. The study focuses on the implications of Basel II, particularly on the calculation of minimum capital requirements and the use of internal and external ratings.

• The importance of SMEs in the German economy
• The impact of Basel II on banking regulation and capital requirements
• The role of internal and external ratings in assessing the solvency of SMEs
• The challenges and opportunities for SMEs in adapting to the new regulatory environment
• The potential consequences of Basel II for the future of SMEs in Germany

Zusammenfassung der Kapitel (Chapter Summaries)

The dissertation begins by introducing the current problem and objectives of the study. It then provides a detailed overview of the role of SMEs in the German economy, exploring their economic importance, financing practices, and capital structure. The third chapter delves into banking regulation and the Basel Accords, examining the rationale behind financial market regulation and the evolution of the Basel Capital Accord. The chapter highlights the key features of the New Basel Capital Accord and explains the two options for calculating credit risk, the Standardised Approach and the Internal Ratings-Based Approach. Chapter four focuses on the concept of rating, providing definitions, explaining the procedures for external and internal ratings, and analyzing the impact of rating grades on loan terms and conditions. Finally, the dissertation concludes by exploring the potential consequences and scenarios for SMEs in light of Basel II, providing an outlook for the future.

Schlüsselwörter (Keywords)

This dissertation explores key topics such as small and medium-sized enterprises (SMEs), the New Basel Capital Accord, banking regulation, credit risk, capital requirements, internal and external ratings, and the impact of these factors on the German economy.

• College: Oxford Brookes University
• Grade: 1,7 (B+ 68%)
• Author: Nickels Wieneke (Author)
• Publication Year: 2004
• Pages: 66
• Catalog Number: V33384
• ISBN (eBook): 9783638338745
• Language: English
• Tags: Impact, Basel, Small, Medium, Enterprises, Germany