During an online chat on the CMU organised by the European Commission last Monday, EBF reminded the Commissioner in charge Lord Hill that of the 20 million SMEs in the EU, only a fraction would fall within the scope of the project. Many of Europe’s SMEs are small shops, family businesses, etc. The probability of obtaining finance from Venture Capital, Business Angels and Private Equity is considered to be rather low, as they tend to be very selective and are not an option for most (micro) SMEs. The costs (related to the duty of information, obtaining and maintaining ratings etc.) of direct access to capital markets are considered to be very high and are considered to be profitable if there is a high capital need. For this reason, we still believe that a more realistic way to boost SME funding will be indirect, by unclogging bank balance sheets to free them up to offer more lending solutions to SMEs.
The success of the initiative to make capital markets more efficient will also depend on whether or not markets can be made broader and deeper, and on the availability of the necessary liquidity. Despite the slight recovery of the economy in Europe and the expectations for growth, it can be perceived that the liquidity available in the market does not reach smaller companies in Europe. With European banks now adapting to new capital requirements and restructuring profitability, banks’ capacity to grant new credit has become limited. Alternative sources of finance could help European companies complement bank funding, but banks will keep being the preferred source of finance for most SMEs, whose growth and success will heavily depend on banks capacity to grant credit.
Moreover, regulatory uncertainty does not contribute to economic recovery. This, together with the fact that the European economy is highly fragmented, does not allow European businesses to take advantage of its 500 million-strong population. In this regard, we urge the EU Commission to note that the adoption of an unamended Banking Structural Reform proposal will have an adverse impact on the market making capacity of Europe’s bigger banks, and thus also potentially on the CMU. The separation of trading activities out of the universal bank will render market making more expensive, less accessible for customers and decrease liquidity in the markets (fig. 1). As MEP Gunnar Hökmark declared recently when at the EBF, “we do not want to end up with an economic model that shifts from Too Big to Fail from Too Small to Succeed”.
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