Abstract
Small and medium-size enterprises (SMEs) are the engine of economic deve-
lopment, but market imperfections such as those caused by underdeveloped fi-
nancial and legal systems impede their growth. Although SMEs form a large part of private sector in many countries, they face larger growth constraints and are less likely to have access to formal sources of external finance than large firms. SMEs have the characteristics of informational opacity, weak finance, imperfect management and small size. These characteristics bring about moral hazard and adverse election, implying high credit risk of SMEs.
Lending technologies can help facilitate SMEs¡¦ access to finance. The credit supplementation institutions have significant effects on SMEs credit availa-
bility, so it becomes an important issue to policy makers around the globe setting up relevant legal systems and supporting financial assistance to SMEs. Since The New Basel Capital Accord had released the criteria and credit risk models of regulatory capital requirements for banks to follow, how to choose an appropriate model to measure the credit risk of SMEs and reasonably price the loan assets on a risk-return basis have become a common task of banks and the credit supplementation institutions.
This paper uses the model developed by Kuo (2003) - ¡§How to Gauge the Default Probability: An Empirical Investigation of the Market-Based Approach to Bank¡¦s Loan Asset ¡¨ to gauge the probability of default to bank¡¦s loan asset for SMEs which guaranteed by Taiwan SMEG. Using market-based risk neutral approach, the probability of default for each SMEs¡¦ loan will be endogenously determined. This paper also uses the actuarial valuation principles to simulate the reasonable guarantee fee which should be received by SMEG through the breakeven analysis.
The empirical results show that:
1.The tradeoff between recovery rate and the probability of default has joint effects. The probability of default increases rapidly while the recovery rate is over 70% and decreases smoothly while the recovery rate is below 60%.
2.The guaranteed loans over 70% coverage under the Authorized Approach have higher probability of default, as banks usually depend on the credit supp- lementation institutions for the larger portion of subrogation payment.
3.The guaranteed loans below 60% coverage under the Normal Approach have lower probability of default, as banks won¡¦t endure high probability of default and will turn to be conservative while lending to SMEs. Banks must also forward the relevant documents to the Taiwan SMEG for scrutiny and consideration, and it has reduced the default risk.
4.The guaranteed loans of 100% coverage under the Package Credit Guarantee have the highest probability of default if banks fully depend on the whole guaranteed coverage. However the bank loans lose given default will rely on bank¡¦s lending strategy, as the subrogation rate is set to be fixed on a maximum limit of guaranteed loans.
5.Using the actuarial valuation principles, with the estimations of pro-
bability of default the reasonable rate of guarantee fee can be simulated through the breakeven analysis.
The contribution of this paper is to submit the practical value for bank¡¦s loan pricing strategy, lending policy decision and credit risk management, also submit a subsidiary referential implication for SMEG to set the rate of guarantee fee, using the reduced form model to estimate default probability of bank¡¦s loan assets for SMEs which guaranteed by Taiwan SMEG, and using the actuarial va-
luation principles to simulate the guarantee fee through the breakeven analysis.
| Identifer | oai:union.ndltd.org:NSYSU/oai:NSYSU:etd-0709107-232457 |
| Date | 09 July 2007 |
| Creators | Hsu, Fu-tai |
| Contributors | none, none, none |
| Publisher | NSYSU |
| Source Sets | NSYSU Electronic Thesis and Dissertation Archive |
| Language | Cholon |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0709107-232457 |
| Rights | not_available, Copyright information available at source archive |
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