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Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States

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Abstract

We examine the likely competitive effects of implementation of Basel II capital requirements on banks in the market for credit to SMEs in the U.S. Similar competitive effects from Basel II may occur for other credits and financial instruments in the U.S. and other nations. We address whether reduced risk weights for SME credits extended by large banking organizations that adopt the Advanced Internal Ratings-Based (A-IRB) approach of Basel II might significantly adversely affect the competitive positions of other organizations. The analyses suggest only relatively minor competitive effects on most community banks because the large A-IRB adopters tend to make very different types of SME loans to different types of borrowers than community banks. However, there may be significant adverse effects on the competitive positions of large non-A-IRB banking organizations because the data do not suggest any strong segmentation in SME credit markets among large organizations.

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Authors and Affiliations

  1. Board of Governors of the Federal Reserve System, USA

    Allen N. Berger

  2. Wharton Financial Institutions Center, USA

    Allen N. Berger

  3. Mail Stop 153, Federal Reserve Board, 20th and C Streets. NW, Washington, DC, 20551, USA

    Allen N. Berger

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  1. Allen N. Berger
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Correspondence to Allen N. Berger.

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JEL classification: G21, G28, G38, L51

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Berger, A.N. Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States. J Finan Serv Res 29, 5–36 (2006). https://doi.org/10.1007/s10693-005-5106-3

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  • DOI: https://doi.org/10.1007/s10693-005-5106-3

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