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.
Table of Contents
1 Introduction
1.1 The current problem and the papers objectives
1.2 Methodology
2 Small and Medium Sized Enterprises in Germany
2.1 The qualitative aspect
2.2 The quantitative aspect
2.3 The economic importance of SMEs in Germany
2.4 How do SMEs fund their investments?
What is their capital structure like?
3 Banking regulation and the Basel Accords
3.1 Regulation and banking supervision
3.1.1 Why regulate financial Markets
3.1.2 Exhibit: The Asia Crisis
3.2 From Basel I to Basel II
3.3 The Basel Committee and its first Capital Accord
3.4 The current accord’s weaknesses and consequences
3.5 The New Basel Capital Accord
3.6 Two options for a bank’s credit risk calculation
3.6.1 The Standardised Approach
3.6.2 Internal Ratings-Based Approach
4 Rating
4.1 Definition
4.2 External rating: importance, agencies, procedures & notations
4.3 Internal ratings: procedure, example & importance
4.4 Impact on the rating grades on terms and conditions of loans
4.5 Impact on SMEs, how well are they prepared for rating?
5 Conclusion
5.1 Consequences and scenarios
5.2 Outlook for the future
Objectives and Research Themes
This dissertation examines the implications of the New Basel Capital Accord on German Small and Medium-sized Enterprises (SMEs), commonly referred to as the 'Mittelstand', focusing on the transition from fixed-percentage credit calculations to solvency-dependent rating systems and the resulting challenges for corporate financing.
- Economic importance of the German 'Mittelstand' and its capital structure
- Development of banking regulation from Basel I to Basel II
- Mechanisms of credit risk calculation and internal rating approaches
- Rating preparation strategies for SMEs to ensure continued access to finance
Excerpt from the Book
4.5 Impact on SMEs, how well are they prepared for rating?
The immediate conclusion is that SMEs have to prepare themselves in advance for the rating processes. This means the enterprise has to improve its rating requirements. Besides meaningful and punctually prepared annual reports, reporting during the year with business management analyses are important. These should enable the assessing institute to evaluate different business sectors, the profit situation of individual products or segments and to continually assess the liquidity-, finance- and investment plans.
In addition the SME should provide information about insurance cover of any kind, concentration of clients and suppliers, whether business is completed on schedule or not and employee turnover rates. Because “many SMEs fail due to badly planned or unplanned corporate succession arrangements” (Ehlers 2003, p. 15) enterprises have to suggest possible meaningful solutions to the assessing institute. The SME should also implement and operate an internal system which controls and recognises risks at an early stage e.g ‘contingency planning’. A contingency plan involves pre-determining future risks and allows the company to be more prepared if these risks should occur (Naylor 1999). With such systems risks which could threaten the further existence of the enterprise can be recognised in time and appropriate counteractions can be undertaken. The results of such a system could be e.g. that the “financial structure of a company can be improved or optimised” (Taistra 2002, p. 23) through reduction in accounts receivable and in stock.
Summary of Chapters
1 Introduction: Defines the scope of the dissertation, highlighting the concerns of German SMEs regarding the introduction of the Basel II accord and outlining the methodological approach based on secondary research.
2 Small and Medium Sized Enterprises in Germany: Provides both qualitative and quantitative definitions of the 'Mittelstand' and analyzes its vital economic role and dependency on bank financing.
3 Banking regulation and the Basel Accords: Discusses the necessity of financial supervision, the history of the Basel Accords, and the shift toward risk-sensitive capital requirements under Basel II.
4 Rating: Explores the definition and importance of credit ratings, detailing the procedures for both external and internal ratings and their direct impact on loan conditions for SMEs.
5 Conclusion: Evaluates potential future scenarios for SMEs under the new regulatory framework and provides an outlook on the necessity of proactive financial management.
Keywords
Basel II, Mittelstand, SMEs, Credit Rating, Banking Supervision, Capital Requirements, Solvency, IRB Approach, Internal Ratings, External Ratings, Financial Stability, Risk Management, Corporate Finance, Germany, Loan Conditions.
Frequently Asked Questions
What is the primary objective of this dissertation?
The objective is to find a balance between the interests of German SMEs and banks within the new Basel II regulatory framework by providing factual and realistic arguments regarding the impact of risk-adjusted loan policies.
Which economic sector does this study focus on?
The study focuses on the German 'Mittelstand' or Small and Medium-sized Enterprises (SMEs), which account for a significant portion of the German workforce and value-added production.
What are the key themes addressed in this work?
Key themes include the economic importance of SMEs, the evolution of banking regulations from Basel I to Basel II, the mechanics of credit risk calculation, and the critical importance of rating preparation.
Which scientific methodology is utilized?
The dissertation relies on the collection and analysis of secondary research, including economic studies, banking reports, and financial media assessments, as primary research from banks is limited due to confidentiality.
What is the focus of the main section of the paper?
The main section covers the necessity of banking supervision, the structural differences between Basel I and Basel II, the implementation of rating systems, and how these changes specifically influence the availability and cost of capital for SMEs.
Which keywords define this work?
The work is defined by terms such as Basel II, Mittelstand, credit rating, banking supervision, and capital requirements, which are central to the discourse on SME financing.
Why is there a so-called 'rating gap' in Germany?
The 'rating gap' refers to the fact that only a small number of German enterprises are externally rated, forcing most banks to develop and utilize their own internal rating systems to comply with Basel II requirements.
How should SMEs prepare for the approaching rating processes?
SMEs should become proactive rather than reactive by improving internal information management, documenting corporate strategy, ensuring timely reporting, and implementing contingency planning to identify and mitigate risks early.
- Citar trabajo
- Nickels Wieneke (Autor), 2004, The Impact of Basel II on Small and Medium sized Enterprises in Germany, Múnich, GRIN Verlag, https://www.grin.com/document/33384
