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July 06, 2018

While speaking at a Conference in Austria, Danièle Nouy of ECB explained the funding challenges faced by small and medium-size enterprises (SMEs). She also discussed how banking regulation and supervision can help alleviate some of the funding constraints of SMEs. If SMEs had a wider set of funding sources to choose from, they would be less dependent on banks. She establishes that the banking union, the capital markets union, and digitalization might help in this regard.

She discussed the levers policymakers need to pull on to improve access to finance for SMEs. The crisis led to higher capital requirements and new capital buffers, such as the capital conservation buffer, were introduced. This triggered some concerns about SMEs in the context that the new buffers would oblige banks to hold more capital against loans to SMEs too—even though such loans had not contributed to the crisis. Thus, the new requirements would overestimate the amount of capital required. To alleviate these concerns, regulators introduced an SME support factor, which reduces the risk-weights for SMEs to balance out the effect of the new capital conservation buffer. In this way, rule makers tailored regulation to ensure that SMEs are not disadvantaged. Of course, banking supervision also plays a role in this.

Citing the example of non-performing loans (NPLs), Ms. Nouy mentioned that during crises, banks with high levels of NPLs tend to charge disproportionately high interest rates on loans to SMEs. This presents another reason for reducing the amount of NPLs on balance sheets of banks. Consequently, guidance has been issued for banks on how to deal with NPLs and how to provision for loans that become non-performing in the future. "Judging by the data, we are on the right track, " as NPLs fell from almost EUR 1,000 billion to just over EUR 720 billion from early 2015 to the end of 2017. Therefore, tough banking regulation and sound supervision do lend some indirect support to SMEs. However, it is still being assumed that banks are the main sources of funding for SMEs. The obvious conclusion is that SMEs would benefit from a wider set of funding sources.

Beyond having access to loans from a wider set of European banks, SMEs should have better options for raising funds on capital markets. On this front, ECB has been a strong supporter of the Capital Markets Union. However, the way toward a truly European capital market is as long as the one toward a truly European banking market—"it might even be longer." This is because "capital markets are very complex and very diverse." For instance, SMEs might benefit from the new framework on securitization as well as from more harmonized regulation for SME listings on public markets across EU. Newly founded SMEs face even bigger problems, as for most of them, funding is still very hard to come by. They are deemed too risky for bank loans and venture capital is close to non-existent in most EU countries. Thus, they have even fewer funding options. A number of fintech activities are seeking to fill this gap. Peer-to-peer lending platforms, for instance, have expanded significantly in recent years. If policymakers want to support SMEs, they need to ensure that such innovations are supported, but also appropriately regulated. Although SMEs face a structural disadvantage when borrowing from banks, this disadvantage becomes even more pronounced in a crisis. Given how important SMEs are for the economy, policymakers are rightfully paying attention to this issue, added Ms. Nouy.


Related Link: Speech

Keywords: Europe, EU, Banking, SME, Capital Markets Union, Regulatory Capital, NPLs, ECB

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