Efforts underway in EU to increase lending to SMEs

Analysts and policymakers are struggling to find a way to improve the long-term financing of small and medium-sized enterprises. This goes beyond energy efficiency and the problem is simply crippling many companies. James Fontanella-Khan reports in the Financial Times that are hopefully on the way within the EU to bring these reforms forward.

Brussels reforms target lending to Europe’s credit-starved SMEs

Brussels presented a series of reforms on Thursday to unlock long-term financing in an attempt to revive lending to Europe’s credit-starved small and medium companies and reignite infrastructure investment across the continent.

The European Commission said that it would take decisive steps to bolster the moribund market for securitisation, reinforce the capacity of occupational pension funds to invest in financial assets and strengthen the emerging online crowdfunding sector.

The announcement indicates Brussels’ main reform priorities for the financial sector in the next five years to speed up Europe’s recovery and steady return to growth in the aftermath of the worst economic crisis since the 1930s.

“Europe has large long-term financing needs to finance sustainable growth . . . Our financial system must regain and increase its ability to finance the real economy,” said Michel Barnier, the EU commissioner responsible for financial services.

“This includes banks as well as institutional investors such as insurers and pension funds. But we also need to diversify financing sources in Europe and improve access to finance for small and medium-sized enterprises that are the backbone of the European economy.”

Europe’s securitisation market came to a standstill after the financial crisis, as the slicing-and-dicing of bonds gained notoriety for being one of the root causes of the meltdown of the financial system.

In 2013, asset-backed securities issued in Europe declined by 38.7 per cent to €180.9bn from a year earlier, according to the Association for Financial Markets in Europe.

The Commission will also make it easier for insurers to hold asset backed securities by easing capital rules on their holdings of less risky and more long-term, investment-oriented securities.

“We must promote high-quality securitisation,” said Olli Rehn, the EU’s economic and financial affairs commissioner.

SMEs in the peripheral eurozone, particularly Greece, Italy, Ireland and Spain, have been “starved” of credit since the sovereign debt crisis as they are forced to pay higher interest rates on bank loans than their competitors in Germany.

New lending to SMEs across the periphery dropped by more than half over the past five years, showed a study by the Institute of International Finance, the global banking industry body, and Bain & Co, the consultancy,

Peter Faross, secretary-general of the European Association of Craft, Small and Medium-sized Enterprises, welcomed the commission’s announcement, but voiced some concerns about the speed and efficacy of the reforms.

“The European Commission must become aware that it is not enough to focus on a few fast-growing start-ups. It needs to react on the credit crunch that millions of SMEs are suffering from at the moment,” Mr Faross said.

The financial services industry reacted positively to the commission’s plan as it will give it an opportunity to boost its business.

Simon Hills, executive director in charge of prudential capital and risk at the British Bankers’ Association, said: “It is time to break the stigmatisation link between European securitisations and the deeply flawed, US subprime securitisation market as it was in the lead up to the financial crisis.”

“The market liquidity of securitisations would be underpinned if supervisors offer them similar liquidity characteristics as covered bonds. That would give non-bank investors the confidence that they could sell their securitisation holdings if need be.”