Capital Requirements for Smes Under the Revised Basel Ii Framework

This article reviews the final changes in the Benchmark Risk Weight Function of the Basel II proposal as of June 2004. A special focus is directed to the impact of the proposed changes to the segment of Small and Mid-Sized Enterprises (SME). One of the main objectives of the recalibration of the IRB approach was to relieve capital requirements for these institutions. We further provide a comprehensive survey of empirical findings on the relationship between the asset correlation and the model parameters probability of default (PD) and firm size. We find that neither the level of asset correlation nor the assumed relationship between correlation and probability of default as it is assumed in the capital accord can be observed in the market. In a final case study we investigate the implications of changes in regulatory capital on credit spreads for SMEs