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Impact of Basel II on Bank-SME Relationships: Insights from Catanzaro's Handicraft Firms

This research analyzes the effects of Basel II regulations on banks' relationships with small and medium enterprises (SMEs), specifically focusing on handicraft firms in Catanzaro, Italy. The study investigates the qualitative and quantitative data SMEs can provide, the financial implications of Basel II requirements such as increased interest rates and collateral demands, and the communication challenges faced by these firms. Findings suggest that significant opacity in information and the financial management practices of SMEs hinder their access to credit and growth potential under the new financial framework.

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Impact of Basel II on Bank-SME Relationships: Insights from Catanzaro's Handicraft Firms

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  1. Small Banking and Financing: a Global Perspective The effects of Basel II requirements on banks-SMEs relationship: the case of the handicraft firms Annarita Trotta - Marianna Mauro University of Catanzaro, Italy trotta@unicz.it mauro@unicz.it

  2. Overview • Introduction; • Objective; • Background; • Methodology; • Main Result; • Conclusion.

  3. Introduction Basel II Agreement The Rating Philosophy • Quantitative Analysis • Qualitative Analysis • Analysis of Guarantees Bank-Small Firm Relationships Communication

  4. Objective The research is aimed at identifying: 1. The real situation of bank-small firms relationship; 2. The level of qualitative and quantitative data that SMEs can transfer to the system; 3. The perspectives of survival and development under the new Basel agreement.

  5. Background (1/2) Increase of the interest rate Basel II: the link between rating and credit cost will be more solid, more structured and more transparent Could this generate a financial restrictive effect for SMEs? Increase of guarantees required CONFIDI

  6. Background (2/2) Basel II will impose a change in small firm bank relationships SMEs: • Informative opacity (Stiglitz and Weiss, 1981); • Vulnerable on the financing aspect (Berger and Udell, 1998; Udell, 2004); • Overlapping among family, property and management (Davis & Tagiuri, 1989; Astrachan, J. H. Klein S. B., & Smyrnios, K. X., 2002); • Absence of external stakeholders (Paoloni & Demartini, 1997)

  7. Methodology (1/2) The questionnaire is divided into 2 sections: • Basic information about the firms; • Data and indicators concerning financial position. To carry on the research the questionnaire methodology is been chosen. Handicraft firms located in Catanzaro Unioncamere Database Sample Investigated Source

  8. Methodology (2/2) The sample has been defined adopting a simple random sampling without replacement. Sampling error: ±4% Confidence level: 95%. Sampling number: 566 units (sampling fraction equal to 8%), which has been extended to 600 in order to cover a non response rate of 6%. Statistical analysis is based on the application of t-test, ANOVA procedure and chi-square test When the number of statistical units was not enough to apply parametric procedures and normality conditions were not meet, the equivalent non-parametric methods have been applied (the Kruskal-Wallis k-independent samples test and Mann Whitney U test).

  9. Main Result (1/4) Answers received: 246 (Non response rate= 59%) Main characteristics of the sample

  10. Main Result (2/4) – SMEs informative capacity Ownership structure Sole Proprietor 87% Implication of family effect • Pocketbook not diversified; • Inefficient financial management; • (In the 85% of cases a responsable for finance doesn’t exist) • Financial structure not efficient; • Stakeholders: proprietor, financer (banks) and • taxation office The risk is high Information not important

  11. Main Result (3/4) – Banks-SMEs relationship Main characteristics of the sample (continue)

  12. Main Result (4/4)- Basel II influence Same Correlation: The Cost of Debt Capital (interest rate) is not associated to: • the firm’s dimension; • the short and medium/long term liabilities. There is a Significant Association among the recourse to Confidi and: • The requirement of guarantees; • The required of an higher indebtedness level; • The indebtedness.

  13. Conclusion There is informative opacity that could limits SMEs in the access to credit; It’s necessary: To improve finance function To communicate

  14. Future research • To define a risk level for micro-entities analysed; • Construction of a model for the appraisal of the credit risk - according to Basel 2- usable from the banks and for SMEs.

  15. ….the financer • Chamber of Commerce of Catanzaro; • Confartigianato of Catanzaro; • Catanzaro Production Activity Government.

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