Latest News & Views features an editorial piece from WSBI-ESBG's Chris De Noose, discussing the important role played by savings, retail banks in financing Europe's SMEs.
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Published: BRUSSELS, 18 January 2016
The release on September 30 of the European Commission Capital Market Union (CMU) package brought focus back to financing Europe's real economy – small- and medium-sized businesses. Sending a strong signal to build stronger capital markets to unlock funding for SMEs, the commission's CMU proposal has potential. It could provide much-needed help in diversifying sources of finance. At first read, start-ups and more mature, growth-minded mid-sized firms will benefit most. For the rest, bank-based lending remains the best route.
Savings and retail banks know the SME financing story as well as anyone. Working daily with SMEs to provide financing, ESBG member banks remain unwavered in their role, despite facing an onslaught of tougher bank rules that flowed from the wake of the financial crisis. Focused on being close-to-customer, their SME lending model helps create and maintain vibrant local economies, providing more than €1 trillion in loans for businesses.
Some argue that US-style capital markets will loosen SME finance flow. Our analysis argues otherwise. For SMEs, bank lending remains, and will remain, front and centre in the EU as well as in America. A 2014 Commission survey on access to finance of enterprises show 62% of SMEs choose bank loans over other forms of financing to expand. Peeling through data, we find Old World lending activity to SMEs virtually the same as in the not-so-New. A US Census study points to American business owners, like their European counterparts, also opting for bank financing. In fact, 70% of those firms – employing less than 500 employees – seek a bank loan to start or acquire a business. The percentage lowers for already-existing businesses, 44% of which seeking out the local bank manager to expand or make capital improvements. SMEs in Europe, 90% of whom having less than five employees, are likely to eschew capital markets funding.
The Commission proposal gets it right on a number of fronts, especially for funding the bigger "Ms" within the Mittelstand. For them, revising the Prospectus Directive by raising thresholds could lower disclosure requirements and lower information obligation. Specific trading platforms for SME shares may breathe life into capital finance also by shedding the same requirements, giving wider access for them at a lower cost. If done tight, the Simple, Transparent and Standardized Securitisation Framework, which provides better capital requirements for qualifying securitization, could boost bank lending.
More must be done for the remaining 99 per cent, however. Overall policy aims must not only look to balance risk and economic growth, but must also cast a closer look at banking regulation that underpins bank financing. Fine-tuning the NSFR, the leverage ratio, risk weights, as well as capital requirements to boost SME lending would provide further help. But if policymakers neglect the need for more bank-based lending, then savings and retail banks would struggle to achieve 'complementarity' with capital markets. That's bad for business.
Chris De Noose, Managing Director, WSBI-ESBG
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