The Adverse Effects of Stricter Capital Regulation on the SME Bank Lending Channel

Abstract

The aim of this thesis is to investigate if stricter capital regulation creates negative shocks in the loan market and if these shocks adversely effect Small and Medium sized Enterprises (SME) access to external financing through the bank lending channel. This is tested through a Difference-in-Difference (DiD) model, where loan volume and interest rates of SMEs are compared to large firms in Europe from 2011 to 2016. The results indicate that there is a significant difference in both loan volume and price after 2014 when Basel III was implemented. Contrary to what was expected, the analysis show that SMEs seem better off after the implementation. The increase in lending and decrease in price towards SMEs relative to large firms indicating a healthier system. The mitigated effect of Basel III is assumed to be caused by factors such as the SME Supporting Factor.