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Abstract
This paper analyzes the impact of the guarantee provided by mutual guarantee societies (MGSs) on the risk premium that banks should charge for small- and medium-sized enterprise (SME) loans under the new Basel Capital Accords (Basel II and III). We also examine whether the foreseeable decrease in the theoretical credit risk premium would be compensated by the cost of the MGS guarantee. To do so, we develop a rating system for SMEs that uses a large sample of Spanish firms over the period from 2005 to 2009. We find that the final effect of the guarantee on the SME risk premium depends on the values taken by the credit variables of the MGS (essentially, the probability of default).
Acknowledgements
The authors acknowledge the helpful comments and suggestions of two anonymous reviewers as well as participants of the 2009 Financial Management Association International (FMA) European Conference, the 2011 Annual Meeting of the Brazilian Academy of Management (ANPAD), the 4th Spanish Workshop on Risk Management and Insurance (RISK2011), and the 2nd Spanish Workshop on Entrepreneurial Initiative, SMEs and Family Business. This work was supported by the Regional Government of Andalusia, Spain [Project of Excellence P09-SEJ–4467]. The usual disclaimer applies.
Notes
1. A new and innovative financial instrument to improve the creditworthiness and reduce the borrowing cost of SMEs is described in Zhang and Wu (2012).
2. The Spanish system of public support to MGSs is based mainly on counter-guarantees granted by CERSA (Compañía Española de Reafianzamiento, S.A.), an instrumental society of the Spanish Government. The coverage rate (30 to 75%) depends on policy priorities, such as innovation promotion, and types of operations, such as investments. CERSA has also a helpline to assist companies with less than 100 employees.
3. The SABI database is compiled by the Bureau van Dijk Electronic Publishing. See http://www.bvdinfo.com/Products/Company-Information/National/SABI.aspx for a more detailed description of the database.
4. Other significant works that have examined different aspects of the Basel Capital Accords are those by Andersen (2011); Antão and Lacerda (2011); Cardone-Riportella and Trujillo-Ponce (2007); Dietsch and Petey (2004); Drehmann and Gambacorta (2012); Hakenes and Schnabel (2011); Johnston (2009); Kerkhof and Melenberg (2004); Lindquist (2004); Medema, Koning, and Lensink (2009); Repullo and Suárez (2004); and Scellato and Ughetto (2010).
5. We have borrowed the average default rate reported by Saurina and Trucharte (2004) for Spanish SMEs over 1994–2001 as input to select (part of) our sample due to the lack of current statistics on Spanish SME default rates.
6. INE data account for small and large firms. Unfortunately, we could not obtain bankruptcy data decomposed by sales volume.
7. We included interaction terms in the form of year dummy variables multiplied by the explanatory variables for all years considered. This methodology allows us to test whether the determinants of default differ through the different years of the economic cycle.
8. The financial literature concludes that including qualitative variables improves the model’s predictive power. Despite this finding, we are obliged to use only firms’ financial statement data because the SABI database does not contain qualitative variables.
9. Under the IRB approach, for the purposes of the firm-size adjustment for SME borrowers, companies with sales of less than €5 million are treated as equivalent to €5 million.
10. A more exact determination of the credit risk premium would involve using the concept of economic capital instead of regulatory capital.
11. The formula for calculating risk-weighted assets for MGS exposures is the same as that used for bank exposures: see Basel Committee on Banking Supervision (2004), paragraph 272.
12. The Basel Accords establish a minimum PD value (0.03%) under the IRB approach.
13. We assume the following data taken from the Confederation of Spanish Mutual Guarantee Societies (CESGAR) (2010): average amount of the guarantee (A), 66,000€; study commission (SC), 0.5%; guarantee commission (GC), 1.0%; contribution to the capital of the MGS (SQ), 1.0%; interest rate (i), 6.0%; and average term of the loan (n), 8 years.
14. We have not considered that the lower creditworthiness measurement cost of MGSs in comparison with SMEs could affect the loan interest rates. For a more detailed insight, please see He and Wang (2007).
15. Please see http://www.moodysanalytics.com for detailed information about Moody’s KMV RiskCalc model. An analysis about different models used to obtain the PD can be found in Murro (2013).
