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

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

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.