18 April 2013

Stewart Fleming: Funding crisis for Europe's SMEs threatens recovery

Europe's businesses are being stifled by the dead weight of a weakened and comatose banking system that plays too dominant a role in the continent's economy. The president of the European Central Bank, Mario Draghi, speaking after the meeting of the bank's governing council on 4 April, pointed out that in the eurozone “roughly 80 per cent” of corporate financing comes through the banking system. The same is true for the United Kingdom.

A far smaller proportion of corporate finance comes from capital markets, which is the realm of multinational companies, not the small and medium-sized enterprises (SMEs) that together account for the bulk of Europe's jobs. In the United States, precisely the opposite is the case. Financial markets, not banks, provide the lion's share of corporate finance. “There is, in Europe, a scarcity of alternative sources of finance apart from banks”, says Karel Lanoo of the Centre for European Policy Studies, a Brussels think-tank. Partly as a result of their different financial structures, the banking/economic catastrophe that began in the transatlantic region in 2007 has not hit the US as hard as it did Europe. It has also been more quickly overcome.

What makes matters worse in Europe, is that the too-dominant banking sector is not yet out of the emergency room. Weak banks are still under fierce pressure to cut back their lending, rather than increase it. The capital-intensive business of lending to SMEs is vulnerable to capital efficiency savings...

Draghi's historic promise to “do whatever it takes” to save the euro took some pressure off both these sovereign debtor nations and big companies, by sharply lowering their borrowing costs, but this has not fed through to SMEs. Those steps that have been taken, such as the ECB accepting, as collateral for providing bank liquidity, qualifying loans to SMEs and increased (indirect) lending to SMEs by the European Investment Bank, are merely drops in the ocean.

Graham Bishop, a London-based financial consultant, hopes that “once the single [bank] supervisory mechanism is up and running it will encourage banks branching around the EU and stop regulators in some countries (Germany and France are frequently mentioned) ring-fencing their banks and preventing them from providing surplus liquidity to parts of their corporate networks in other jurisdictions".

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