- HOW DO WE MEASURE RISK? We then consider how the advent and growth of markets for financial assets has influenced the development of risk measures.
- And supply chain management.
Restoring financing and growth to Europe's SMEs - Bain Report. Restoring SME health and growth has moved to the top of policy making agendas in Europe and elsewhere in the developed world.
The challenges facing SMEs, especially access to finance, have been the focus of numerous studies by national and European authorities, academic papers and reports from business and banking associations, not to mention daily media coverage. The publication of these many detailed reports and recommendations—some several years ago now, during the initial years of the global financial crisis—has yielded uneven progress at best. More important than delineating the relative importance of tightened credit supply and reduced borrowing demand—a challenging task, the interviews made clear—is moving from reports to action, agreeing and implementing those policy initiatives and funding solutions that address the underlying structural challenges faced by SMEs, banks and nonbank investors. Progress is needed, then, on two fronts: improving SMEs’ financial health and transparency, and broadening the base of financial institutions able to identify and fund promising SME activities.
The first part of this report details four sets of impediments identified in the interviews, which will need to be addressed to make progress toward achieving these two overarching objectives. To address these impediments effectively and to drive systematic decision making and faster implementation, we suggest that the European Council recommend the establishment of a coordinated European process, steered by the European Commission and focused on national task forces.
Working to develop tailored, technical, nonpolitical action plans addressing each of the four sets of impediments, the task forces would be composed of the relevant national government and central bank officials, SME associations, banks and alternative funding groups to bring together all the critical stakeholders needed to develop and implement the measures they agree. The final section of the report details how this process might work. EU- level leadership will be critical, our interviews made clear, to ensure the close coordination of shared insights and potential solutions across national task forces. Advanced by the direct involvement of the European institutions, especially the European Council, a “drumbeat” of regular updates can act as an effective catalyst to press ahead with difficult decisions that may be needed at the national level. Last but not least, European institutions can provide strong incentives—via EU and EIB Group funds—for national governments to engage fully in advancing those changes in incentives and regulations that will be needed to broaden SMEs’ access to finance. Contents. Overview: Restoring financing and growth to Europe’s SMEs.
There have been many decades of political and financial. COMPLEXITY, INNOVATION, AND THE REGULATION OF MODERN FINANCIAL MARKETS. It has also exposed conventional financial theory as fundamentally incomplete.
Impediment 1: Information about SME creditworthiness and potential is too costly and difficult to obtain. Impediment 2: SMEs face many disincentives to achieving greater scale to be competitive and financially healthy. Impediment 3: Banks are able to shoulder less credit risk than before the crisis.
Impediment 4: Alternative funding providers face many barriers to financing SMEs. A well- defined process is needed to assure progress easing impediments to SME financing. Overview: Restoring financing and growth to Europe’s SMEs. SMEs are critical to European economies.
They provide two of every three jobs and account for 5. GVA). SMEs play an even more prominent role in Italy, Portugal and Spain, where they account for 2. European average. Sustained economic recovery in Europe thus hinges on restoring the health of SMEs across the EU. SME competitiveness eroded substantially in the years prior to the financial crisis, by more than suggested by nationwide increases in relative unit labor costs, the broadest measure of external competitiveness.
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Larger firms could better limit wage costs by shedding labor and shifting production abroad. The actual rise in relative unit labor costs among SMEs, as a result, likely exceeded the nationwide figures from 2. Ireland to 8% in France (see Figure 1). Since then, the recession has brought these costs down in Ireland, Portugal and Spain, clawing back 8. In France, Italy and the Netherlands, by contrast, only one- fifth to one- third of much smaller competitiveness losses have been reversed. ECB survey data make clear that SMEs have made less progress reversing such losses than larger firms, adding to the challenges they face in trying to shift toward exports. The size of SMEs and how they are managed also vary significantly from country to country.
For example, the average SME in Germany is more than twice as large as its counterparts in Italy and Spain. German SMEs—the Mittelstand—often have separate ownership and management, while firms in Italy and Spain typically are family owned and managed. The sophistication and professionalism of SMEs’ management across the EU vary significantly. Each country is unique, but common factors have contributed to a fall in SME lending. In the six countries under review, new bank lending to SMEs (using loans of less than . Declines from the peaks range from 2. Italy, the Netherlands, France and Portugal and were 6.
Spain and 8. 2% for Ireland (see Figure 2). In fact, European Central Bank (ECB) surveys show tighter credit standards in the majority of quarters since 2.
Figure 3). In our interviews, banks also confirmed that they are setting more stringent collateral requirements and lower loan- to- value ratios on real estate, as well as seeking larger personal guarantees. SMEs have borne the brunt of these measures through diminished credit availability in most half- year periods since the ECB began surveying them in 2. Euro Area core (see Figure 4). Credit tightening has affected some SMEs more than others. Smaller and regional lenders, such as the former cajas in Spain and the regional banks in Italy, traditionally provide a much higher share of SME lending than their larger peers.
As many of these institutions now are deleveraging faster than their peers, their customers have struggled to find credit from other lenders (see Figure 5). At the same time, rapid restructuring of entire banking sectors, notably in Ireland and Spain, has left fewer players in the market. As larger SMEs find themselves with fewer banking relationships, they are bumping up against the maximum share- of- wallet exposure, which limits how much credit banks are willing to extend to any one SME.
In addition, we heard in the interviews that the supply of bank loans available on the easier terms of the pre- crisis period has also been diminished by banks’ responses to the financial crisis: Rebuilding their capital bases. Banks across Europe have been pressed by regulators and markets to strengthen their capital positions at a time when earnings and capital have come under pressure from increases in funding costs and rising non- performing loans (NPLs) due to downturns in economic activity. Enhancing risk standards. Tightened credit policies since the crisis leave banks much less able to serve higher- risk segments, such as start- ups, real estate companies or firms with less certain credit records. Rebuilding core risk management skills. Banks are applying deeper financial assessments of their clients and leveraging stronger credit skills, for instance, to determine whether a business is capable of generating sufficient free cash flow to repay a loan.
Our interviews also suggested that some banks are using blunt tools to reduce demand. Some banks have introduced pricing caps and will not serve customers whose risk pricing falls outside those caps, which can be as low as a 1. Bankers in all countries made it clear SME demand existing outside of this range previously would have been served. Interviewees also reported that banks are using more rigorous and elongated credit approval processes of four to six months, which have the effect of suppressing demand. For instance, the Irish central bank views this “slow no” as a significant issue and is tracking data on the length of time to approve a credit application.
A return to prudent lending practices should, over the long run, help create a more robust financial sector that funds a larger number of viable and high- potential SMEs. In the near term, though, this dynamic has created a situation in which some SME segments have seen a significant decline in the supply of loans. Credit demand has shifted from investment to working capital needs.
Before the crisis, SMEs typically sought long- term funding (often collateralized by property- related investments) and leveraged personal guarantees or overdrafts. Due to steep declines in domestic spending throughout the six countries we visited, we heard that much business capacity is sitting idle. As a result, business investment has fallen sharply, with ECB and other surveys suggesting steeper drops among SMEs than larger firms. Most banks reported sizable declines in credit application volumes. The findings of our interviews are confirmed by what banks and SMEs have reported in ECB demand surveys (see Figures 6 and 7). Since the crisis, SME credit demand has shifted from long- term investment to short- term working capital. Some of the shift is driven by good demand, as when SMEs seeking new export markets require short- term funding to help them build new customer relationships or adapt their products.
However, some of the shift also comes from bad demand when, for example, an SME’s customers delay payment. Payment delays by local and regional authorities were identified as the main cause of growing receivables in our interviews in France, Italy and Spain, and several European and national initiatives are underway to tackle this issue. Bad demand also takes the form of loss financing sought by firms facing great financial stress.
Unprofitable and nonviable SMEs seek credit to stay in business, delaying hard choices about restructuring or winding down operations.