16.12.2014   

EN

Official Journal of the European Union

C 451/20

Rapporteur:

Mr SMYTH

1.1

After more than six years of financial and economic upheaval, the normal channels of funding for businesses, particularly SMEs, remain partially blocked. Banks, the traditional source of most SME funding, are less willing to lend due to a number of factors such as ongoing deleveraging, higher capital and liquidity ratio requirements, bad debt provision and risk aversion. This fragmentation of financial markets and funding channels has been one of the most persistent features of the financial crisis in Europe.

1.2

The decline in working capital lending to SMEs is a chronic form of market failure which demands an appropriate response from EU policymakers. To date this response has not been proportionate to the problem.

1.3

The ECB’s LTRO initiative (1) was successful in averting the collapse of the banking system but most of its funding has not been transmitted through to the real economy. Instead, it has been used to consolidate banks' balance sheets and it represents a missed opportunity because businesses continue to be starved of working capital.

1.4

The EIB, which has been very active in supporting SMEs across Europe has been substantially recapitalised and has enhanced its lending to SMEs. SME support represents the single largest policy priority of the EIB Group, accounting for more than 20 % of the EIB annual lending volume and 100 % of EIF activities. Even though the EIB is a significant provider of development finance for SMEs its share of total business lending in the euro area remains small.

1.5

The EESC supported last year’s Green Paper on long term financing of the economy (2) and this has been followed by a recently published package of measures (3) to promote long-term finance in general and to target funding for SMEs in particular. The package comprises measures to boost the use of securitisation of SME loans. The Commission also proposes new rules to encourage pension funds to invest in financial assets and thus to support the financing of longer term growth in the real economy (4). There are also proposals to create a liquid and transparent secondary market for corporate and other types of bonds. The EESC welcomes these proposals and believes that they can, in time, contribute to a reformed and more efficient market for SME finance.

1.6

Several other initiatives are under way to remove impediments to more accurate assessment of credit worthiness and risk by lenders. They include greater use of digital repositories with standard submissions for business registers, statistics offices, bank credit assessments and other lenders and the eventual establishment of a European central credit registry. Better, more up-to-date information on SME financial performance should enable better risk assessment by lenders and more appropriate pricing of risk.

1.7

A number of other proposals to improve access to SME finance are now either underway or under consideration. The EESC supports this more proactive response from policymakers but they will take time to implement. The challenge remains what to do now and in the short-term to improve SME access to finance.

1.8

A ‘one size fits all’ solution may not be suitable in all Member States. Some Member States have developed approaches that are suited to their national financial structures and regulations. One of the most interesting initiatives is the Funding for Lending Scheme in the UK (5). It was extremely successful in boosting mortgage lending and lending to households in the UK over the past two years and is now in solely at boosting SME lending. The scheme incentivises participating banks to increase the net lending to SMEs by reducing the cost of funding. Supporters of the scheme argue that lending to SMEs would be much lower if the scheme were not in operation.

1.9

The EESC sees the Funding for Lending Scheme as an example of good practice and recommends that the ECB give serious consideration to the introduction of a similar initiative in the euro area. On 5 June 2014 the ECB announced a set of liquidity measures to boost bank lending to SMEs (6). The EESC is pleased to note that the ECB's main proposal, called Targeted Longer-Term Refinancing Operations (TLTROs), is similar to the FLS as outlined in this opinion. It is also good to note that the work of the EESC in this opinion has preceded the evolving thinking of policymakers.

2.1

The debate about business lending and finance has tended to focus on the supply and demand for development or investment capital, especially for SMEs. Lenders tend to point out that there is a shortage of new projects and hence in the demand for development finance. Representatives of SMEs and mid-cap businesses often complain about both the supply of development finance and the cost of such credit, claiming that banks have been overpricing risk finance. Both points of view may contain elements of truth. Either way, the stock of lending to businesses both large and small has been at best static and at worst falling sharply across member states of the EU.

2.2

For the purposes of this EESC opinion, the focus is not on development capital or finance for new businesses or start-ups or innovations. Rather the opinion deals with the issue of access to working capital — overdraft facilities and rolling credit facilities that are the lifeblood of most businesses. Trends in lending for working capital are difficult to identify precisely due to the lack of data, but the broad trend can be seen in the ECB data of lending to non-financial businesses. These data have been falling for the past four and five years and only in the last few months show some signs of recovery.

2.3

One of the most enduring dimensions of the financial and economic crises of the past six years is the severe decline in finance for business. As European banks have struggled to reduce their exposure to impaired loans and worthless debt, the normal supply of working capital for business, particularly smaller businesses and micro-enterprises, has declined in both nominal and real terms. This decline in lending to business could be described as a chronic form of market failure. In addition the fragmentation of European financial markets has led to a two-tier structure of lending rates. Small businesses in Italy and Spain for instance face much higher interest charges than similar businesses in Germany and the UK. To date the response from EU policymakers has not been proportionate to the problem and there is some evidence that the effects of enhanced EU and international banking regulation may have exacerbated the business lending problem by making banks more risk averse.

3.1

EU policymakers have struggled to deal with the fallout of the financial crisis and its impact on the real economy. The fragility of the EU banking system has become a major constraint on economic recovery. To help alleviate this fragility the European Central Bank (ECB) in 2012/13 embarked upon an unprecedented initiative to give EU banks access to over EUR 1 trillion of relatively low-cost money. This initiative was termed the longer-term refinancing operation (LTRO). It was a response to the threat of a banking freeze or a banking collapse as banks struggled to repair their balance sheets and achieve compliance with tougher regulatory capital ratios. LTRO was successful in averting the collapse but most of this funding was not transmitted through to the real economy. Instead, it has been used to consolidate banks' balance sheets. In one sense this outcome was predictable and understandable. The priority for most European banks was and continues to be survival. In another sense this outcome represents a missed opportunity because businesses continue to be starved of working capital.

3.2

In March 2013, the European Investment Bank (EIB) was substantially recapitalised. Its paid-up capital was augmented by a EUR 10 billion cash injection from shareholders. The EIB expects to be able to expand its already substantial lending to SMEs by up to EUR 40 billion over the next three to four years. The recapitalisation has helped the EIB to enhance its lending to SMEs. SME support represents the single largest policy priority of the EIB Group, accounting for more than 20 % of the EIB annual lending volume and 100 % of EIF activities. EIB lending to SMEs, however, tends to be used mainly for development capital, innovation and new projects. It is understood that the provision of working capital lending is under consideration by the EIB and it will be interesting to note the outcome of these deliberations. Even though the EIB is a significant provider of development finance for SMEs its share of total business lending in the euro area remains small.

3.3

In the UK and US, monetary authorities have resorted to some unorthodox measures such as quantitative easing in order to provide liquidity to the banking system. This policy involves the purchase of very large amounts of sovereign and corporate bonds by central banks and the creation of new money into the banking system. It has helped to avert the freezing up of money markets and the monetary transmission mechanism in both the US and the UK. There is some evidence that in the US the quantitative easing programme has helped to expand credit and finance in the real economy. The US monetary authorities are now contemplating tapering it as economic recovery becomes more entrenched. In the UK, the forward guidance of the Bank of England suggests that once economic recovery becomes well-established, the policy of quantitative easing will also be ended.

3.4

The Commission published a Green Paper on long term financing of the economy in March 2013 (7) and has followed this up with a package of measures to promote long-term finance in general and to target funding for SMEs in particular (8). At the core of this package are measures to boost the use of asset backed securities (ABS) of SME loans. Wider use of ABS would free up banks and other financial institutions to engage in greater volumes of lending to business. The Commission also proposes new rules to encourage pension funds to invest in financial assets such as ABS and thus to support the financing of longer term growth in the real economy (9). There are also proposals to create a liquid and transparent secondary market for corporate bonds and to improve the attractiveness of covered bonds and private placements. There is a communication on crowd funding (10), which aims to promote best practices, to monitor the development of crowd funding markets and to facilitate the emergence of a quality crowd funding label.

3.5

Several other initiatives are relevant here. Impediments to more accurate assessment of credit worthiness and risk by lenders usually revolve around the cost and lack of relevant financial information. The Institute for International Finance (IIF) proposes a series of measures to lessen these impediments. They include greater use of digital repositories with standard submissions for business registers, statistics offices, bank credit assessments and other lenders. These national repositories of credit risk data should be consolidated with the European Data Warehouse, eventually leading to a European central credit registry. The IIF calls for the setting of Europe wide standards for information collection and reporting so as to enable cross company and cross national analyses. Better, more up-to-date information on SME financial performance should enable better risk assessment by lenders and more appropriate pricing of risk.

3.6

Other proposals to improve the flow of finance to SMEs include:

4.1

The task of designing a scheme to encourage greater access to finance right across the Union is not straightforward. Some Member States have developed solutions that are suited to their national financial structures and regulations. A ‘one size fits all’ approach may not be suitable in all Member States. One of the most interesting initiatives is the Funding for Lending Scheme (FLS) in the UK and it is worth a closer look.

4.2

The UK Treasury and the Bank of England introduced the FLS in July 2012, in an attempt to boost lending to the real economy (11). The Treasury, as shareholders of the Bank of England, have oversight of the operation of the FLS. The FLS offers participating banks a cheap source of funding and these lower funding costs should allow banks to increase the availability of credit by cutting the interest rates they charge. The scheme incentivises banks to increase their lending and so enable them to draw down additional funds from the scheme. Since its inception, the FLS has contributed to a substantial fall in bank funding costs and this has fed through in the form of improved credit conditions. It is fair to say that most of the success of FLS to date has been in stimulating lending to households and mortgage lending in particular. It was less successful in boosting business lending and so in November 2013, the authorities adjusted the FLS to concentrate only on stimulating lending to SMEs.

4.3

The FLS is a scheme designed to give a commercial incentive to participating banks to increase their net lending (i.e. gross lending minus repayments). The scheme offers discounted funding to all banks, even to those banks which are deleveraging. The scheme has no upper limit as to the amount of funding banks can tap into. To illustrate, if a participating bank has a stock of business lending of EUR 100 billion at the start of the scheme, it could draw down at least EUR 5 billion in funding. If the same bank then increased its net SME lending by a further EUR 1 billion, it would be entitled to draw down a further EUR 5 billion from FLS. This five to one ratio of drawdown to new net lending to SMEs, together with the cheaper cost of funding, provides powerful incentives to banks to expand lending (12).

4.4

The Bank of England is monitoring the amended FLS. Most UK financial institutions are participating in the FLS. The revised scheme aimed solely at boosting business lending has been in operation since November 2013 and it is probably too early to draw any meaningful conclusions about its effectiveness. Some of the biggest banks in the UK and in the euro area continued to deleverage quite rapidly and this probably accounts for much of the decline in business lending. Supporters of FLS argue that the credit situation in the UK would be much worse without the availability of FLS funding.

4.5

The EESC believes that a similar scheme to FLS should be implemented across the euro area. A euro area FLS-type scheme could, over a limited period of up to two or three years, contribute to a restoration of finance for business to more normal levels while facilitating the ongoing deleveraging process.

4.6

On 5 June 2014 the ECB announced a set of liquidity measures to boost bank lending to SMEs (13). The EESC is pleased to note that the ECB's main proposal, called Targeted Longer-Term Refinancing Operations (TLTROs), is similar to the FLS as outlined in this opinion.

4.7

Most of the proposals to improve access to finance for SMEs put forward by the Commission have been welcomed by the EESC but they are mostly set in a medium to longer term timeframe and may require new legislation and/or institutions. Meanwhile the funding crisis in working capital for business is immediate, pressing and arguably getting worse. The EESC believes that EU policymakers should do more to provide shorter term solutions such as the incentive schemes (FLS or LTRO) outlined above. Any heightened financial or reputational risks must be weighed against the 26 million unemployed people (5.6 million aged under 25) in the EU.