Abstract
The introduction of the SME Supporting Factor (SF) allows banks to reduce capital requirements for credit risk on exposures to firms with a turnover of below EUR 50 million. This means that banks can free up capital resources that can be redeployed in the form of new loans. Our study documents that the SF alleviates credit rationing for medium-sized firms that are eligible for the application of the SF but not for micro/small firms. These results suggest that European banks were aware of this policy measure and optimized both their regulatory capital and their credit exposures by granting loans to the safest SMEs. Several extensions are used to isolate the effects of the SF on SME lending and to make them clearly visible.
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