Are Unexpected Loan Losses Lower for Small Enterprises Than for Large Enterprises?

Abstract

Unexpected loan losses have been lower for loans to small- and medium-sized enterprises (SMEs) than for those to large enterprises in about ⅔ of the period reviewed in this article. In the remaining period, including two of the years during the banking crisis, unexpected losses were higher for loans to SMEs. The results depend in part on the models and calculation methods used. Consequently, we do not have a basis for concluding that unexpected losses are generally lower for loans to SMEs than for loans to large enterprises. Under the Basel II framework, the capital requirements for loans to SMEs have been reduced (“SME discount”). We do not take a concrete position on this discount. The results of our analysis indicate, however, that an SME discount cannot necessarily be rejected.