European regulatory changes will make banks less willing to lend to SMEs

Changes in the regulatory framework will raise barriers to bank lending to SMEs through the finalization of Basel III and the implementation of Basel IV by 2022. The regulatory changes will increase funding costs and make banks less willing to extend loans, particularly to SMEs with below-average creditworthiness. We estimate that funding costs may increase by more than 100 basis points for companies with low credit quality.

Current mechanisms that reduce the capital requirements for banks that lend to SMEs, such as the SME Supporting Factor, have the potential to counteract the negative repercussions of increasing minimum capital requirements. However, they currently only apply to loans worth EUR 1.5 million or less. This accounts for 30% of total new loans to corporates in the Eurozone overall, but 47% in Italy and 53% in Spain (against 30% in France and 18% in Germany). This suggests that the impact could be higher in Southern European countries.

To ensure SMEs have adequate financing and can further diversify their funding sources, the EU Capital Markets Union (CMU) aims to make it easier for them to tap alternative sources of funding and reduce their overreliance on bank financing. The framework for the CMU implementation is planned to be completed by the end of October 2019. While progress has been made in various areas in implementing the CMU, the original goals have not yet been attained and its finalization could take longer than expected, given that the topic is not a priority for all the mainstream European parties which are expected to form a coalition following the May 2019 elections.

Direct lending by private and institutional investors to SMEs has become increasingly important in Europe. We assume that SMEs will rely more and more on non-banks and less on banks for their financing needs. The Eurozone household saving rate stands at a high 12.1%, amounting to around EUR 860 billion of available capital per year. We estimate that if, out of the 30% of total savings invested in securities, one fourth went to funds that invest in SMEs, this would unlock around EUR 65 billion per year. This additional funding would compare to an average monthly flow of bank loans to SMEs of close to EUR 41 billion in 2018.

Contact

Ana Boata
Allianz Trade