This is the result of record low bank loan interest rates and higher loan availability thanks to ECB support which have pushed up loan supply mainly in core countries (Germany, France, Belgium and the Netherlands), but also higher non-bank financing sources.
At the same time, the decline in the financing gap is also linked to a significant downside adjustment in loan demand in Southern European countries, such as Italy and Spain. A delayed recovery in fixed capital formation and an improved self-financing capacity, notably since 2015, partly explain the trend.
Country heterogeneity persists. The highest SME bank loan financing gaps are in the Netherlands (22% of GDP), Belgium (14%), France (9%) and Italy (4%). In the first three countries, the gap is essentially linked to the high SME debt stock but also higher economic activity, though the increase in debt has been higher than the one in activity. In Italy, the gap is mainly explained by the supply constraint.
Since European SMEs depend on banks for 70% of their external financing (against around 40% in the U.S.), any gap between loan demand and supply could lead to lower investment growth if companies don’t have the means to self-finance their investments. This could be a constraint for overall economic growth.