Basel III Implementation and SME Financing

Abstract

This paper examines the effect of Basel III implementation on the access to finance of small and medium-size enterprises in 32 emerging markets and developing economies. Analyzing rich, repeated cross-sectional data and a panel of matched firm-bank data in a difference-in-differences setting with sample selection adjustment, the authors find a short-term, moderately negative effect of Basel III on small and medium-size enterprises' access to financing. The results suggest that firms with access to bank credit prior to Basel III implementation could have been affected less than firms that were initially on the fringes of financial inclusion—firms with only a bank account. The paper fails to find any additional heterogeneous effects across firm size or age, bank capitalization or liquidity, or across countries that transitioned to Basel III from Basel II versus Basel 2.5. Overall, the initial conditions of the banking system as well as of complementary business and financial regulation can co-determine the size of short-term costs from the newly implemented global financial regulation in emerging markets and developing economies.