Small Banking and Financing: a Global Perspective

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.