Basel III - Financial stability at the Expense of innovation and economic growth? : An Analysis of the Possible Effects Basel III have on Access to Funding for Small and Medium Sized Enterprises, Entrepreneurs and Economic Growth

Abstract

This thesis investigates the impact of intro ducing the Basel III banking regulations. Specifically how it affects access to funding for innovative SMEs and entrepreneurs. Access to funding for these ent erprises is vulnerable, thus an interesting question is whether Basel III improves or deteriorates the situation. The financial crisis had a major negative impact on the world economies and caused permanent losses, both contributing to a d ownward revision of prospects for economic growth. SMEs and entrepreneurs are key participants in impr oving economic growth, hence the question of how Basel III affect economic growth through possible changes in access to funding for SMEs and entrepreneurs is also addressed in this thesis. Both empirical studies and the discussion s in this thesis find evidence of Basel III affecting access to funding for SMEs and entrepreneurs in a negative way. I t causes reduced lending and increased credit risk premiums , affecting SMEs and entrepreneurs to a greater extent than la r ger fi r ms . However, findings suggest that the country - to - country differences will diverge. I also find that SMEs and entrepreneurs’ access to funding is dependent on the economic environment. Thus, a stable economy, which is the objective of Basel III, in the long term, may ease the access t o bank lending. This effect also applies to alternative funding such as venture capital. Both bank lending and venture capitalists are procyclical in supply of credit, hence less fluctuation in the economy result in a reduction in volatility of the suppl y of credit to SMEs and entrepreneurs . Based on these findings the impact on economic growth seems to be divided. The findings implies a slowdown in economic growth in the short term, while future prospects will increase because stability in the economy r educe probability of a costly crisis and ease the access to funding.