Banking

Evidence for emerging markets and developing economies

Source: Fisera, Horvath, and Melecky 2019.

The economic effect of Basel III implementation on SME access to financing in EMDEs can range between negative 0.244 and negative 0.593. The SME access to financing variable has a mean of 3.43 in our sample of EMDEs and a standard deviation of 1.31. These values imply that Basel III implementation could, on average, increase the access to finance constraints by about one-third of the standard deviation. Although this effect could be less economically important for countries such as Turkey and the Philippines, with the best financial access in our sample (values of 4.3 and 4.2 out of 5), it may be more important for countries such as Kenya and Ghana, with the worst access (2.4 out of 5). For instance, Basel III implementation could, keeping other things constant, push Peru (3.8) back to the level of Ukraine (3.4), or it could push Thailand (3.4) back to the level of Argentina (3.0). On economic significance, we thus assess the short-run effect of Basel III implementation on SME financing in EMDEs as moderately negative.  

We also find that financial crises curtailed the progress in easing SME access to finance across the board. In contrast, SMEs in countries with better contract enforcement saw their access to finance ease significantly more. The analysis suggests little support for varying Basel III effects across firm size and age, or bank capitalization and liquidity positions. And the adjustment cost for SME access to finance is not smaller if countries transitioned to Basel III from Basel 2.5 as opposed to Basel II.

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The policy implications of the discussed study are threefold. One, well-capitalized and provisioned banking systems could be more successful in improving SME access to finance  and, in turn, cushion any short-term, moderately negative effect of Basel III implementation on SME financing. Two, successful macroprudential management that helps avoid financial crises can help advance SME access to financing, by ensuring a stable and risk-tolerant environment in which banks continue providing credit and financially including SMEs. Three, improving contract enforcement could help avoid situations in which banks preemptively restrict lending when faced with growing risk and uncertainty.

References

Beck, T., A. Demirgüç-Kunt, and V. Maksimovic. 2004. “Bank Competition and Access to Finance: International Evidence.” Journal of Money, Credit and Banking 36 (3): 627–48.

Beck, T., A. Demirgüç-Kunt, L. Laeven, and V. Maksimovic. 2006. “The Determinants of Financing Obstacles.” Journal of International Money and Finance 25 (6): 932–52.

Fisera, B., R. Horvath, M. Melecky. 2019. “Basel III Implementation and SME Financing: Evidence for Emerging Markets and Developing Economies.” Policy Research working paper; no. WPS 9069. Washington, D.C.: World Bank Group.

FSB (Financial Stability Board). 2019. “Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing.” The Financial Stability Board. November 2019.

Source : blogs.worldbank.org

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