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About this book

This book explores how the global financial and European sovereign debt crises have forced small-and-medium-sized businesses (SMEs) to reassess and adapt their funding strategies. At the heart of the matter is the worsening access to bank credit for such enterprises. Through this discussion we learn how crucial an understanding of SME-financing is to policy makers, in light of the fact that SMEs dominate the business landscape in Europe and are the main drivers of employment, growth and innovation in the European economy. Contributing chapters present expert analysis and investigate many topics including the problems faced by SMEs in accessing bank credit and the cost of funding and its determinants. Particular attention is also given to how credit-constrained enterprises may reformulate their funding strategies by employing alternative, non-bank, financial resources, and how regulators could support SMEs in broadening and improving their funding opportunities.

Table of Contents


Credit Market Environment and SME Finance in Europe


1. Non-Bank Financing for Euro Area Companies During the Crisis

During the recent financial crisis the strong dependency of euro area non-financial corporations—and in particular SMEs—on bank financing has left them exposed to the weaknesses and deleveraging needs of the EU banking sector. This chapter examines the extent to which the available non-bank funding sources—from grants/subsidized loans, trade credit, other loans, and leasing to market-based finance—were accessible to companies when bank loans dried up, pointing to differences across firms and countries. Results signal that, during the crisis period, firms reporting they were constrained in their access to bank loans tended to switch more often to trade credit and leasing, but firms in those countries most affected by the crisis faced more difficulties carrying out this switch in financing.
Annalisa Ferrando, Emmanouil Mavrakis

2. Neither a Borrower Nor a Lender Be! Loan Application and Credit Decision for Young European Firms

We investigate the impact of banks’ capability to recover a loan on firms’ propensity to apply for credit and on banks’ propensity to lend, looking at firms from eleven European countries. Our findings suggest that banks’ recovery rates negatively affect firms’ decisions to apply for credit but not banks’ decision to provide credit. We also find that the role of recovery rates differs in economically weak and strong contexts: high recovery rates discourage borrowers only in economically strong countries and have a positive impact on banks’ lending decisions in economically weak countries.
Andrea Moro, Daniela Maresch, Annalisa Ferrando, Julia Barbar

3. Legal-Institutional Environment, Social Capital and the Cost of Bank Financing for SMEs: Evidence from the Euro Area

This chapter addresses the question of whether a country’s legal-institutional and social environment affects the cost of bank financing for SMEs. We employ 22,295 firm-level observations drawn from the ECB SAFE from 2009 to 2013 as a sample of eleven euro area countries. After controlling for firm characteristics and macroeconomic features, we find that a less efficient judicial system as well as a higher degree of concentration of the banking industry increases the cost of funding for SMEs; the latter is instead reduced when the market share of cooperative banks and social capital are higher. Overall, we provide evidence that a better institutional and social environment produces positive externalities in the credit market, thereby favouring the cost of bank financing for SMEs.
Emma Galli, Danilo V. Mascia, Stefania P. S. Rossi

4. Credit Access for Small Firms in the Euro Area: Does Gender Matter?

This paper uses ECB survey data to assess whether gender matters in small firms’ access to credit. Firms owned or managed by women (female firms) use smaller quantities and less heterogeneous sources of external financing than their male counterparts. Female firms apply for bank loans less frequently, as they more often anticipate rejection, and they experience a higher rejection rate. Econometric analysis shows that these different patterns are largely explained by the characteristics that make female firms structurally different from those led by men, without a significant gender effect. This paper also compares the main euro area countries within a homogeneous framework; weak evidence of gender discrimination appears in the supply of bank loans in Germany, Italy and Spain, while demand obstacles arise in France.
Maria Lucia Stefani, Valerio Vacca

5. The Small Firm Financing Premium in Europe: Where and When Do Small Firms Pay the Most?

A key feature of the recent European crisis has been a sharp divergence in financing conditions for small and medium enterprises (SMEs) across countries. We document the evolution of the interest rate differential on loans below and above €1 million—the Small Firm Financing Premium (SFFP)—across banks and countries. A clear bifurcation in the SFFP between stressed and non-stressed economies, beginning in late 2010, is highlighted. At the bank level, we show that banks with higher domestic market shares charge higher SFFP, with this relationship being particularly strong in Spain, Italy and France, but non-existent in Germany. Strong evidence of a “bank lending channel” is provided, with increases in banks’ non-performing loan (NPL) and credit default swap (CDS) spreads being associated with increases in the SFFP.
Sarah Holton, Fergal McCann

6. Sovereign and Bank CDS Spreads During the European Debt Crisis: Laying the Foundation for SMEs’ Financial Distress

Using a sample of 14,910 daily credit default swap (CDS) observations related to 24 banks chartered in seven countries in the Euro area, we assess the existence of a causal relation between sovereign and bank credit risk during 2010–2014. Our results show that CDS spreads of the observed banks are highly influenced by the price dynamics of sovereign CDSs.
Our findings support the widespread view in the literature that a worsening market perception of sovereign credit risk has a significant impact on the behaviour of banks. In response to sovereign shocks, banks transfer the stress to borrowers, thus reducing lending and/or increasing the cost of borrowing for enterprises.
Danilo V. Mascia, Paolo Mattana, Stefania P.S. Rossi, Roberto D’Aietti

7. SME Sources of Funding: More Capital or More Debt to Sustain Growth? An Empirical Analysis

This chapter investigates funding sources available to SMEs as a means of understanding whether difficulties in accessing bank credit stem from the characteristics of the SMEs applying for financing. Based on creditworthiness measures applied to over 500,000 yearly financial statements of euro area SMEs in the 2006–2014 period, we find that the credit crunch experienced by SMEs stems from excessive leverage requirements. However, our analysis shows that more equity is necessary for growth and confirms that an expansionary monetary policy, even based on extremely low or negative interest rates, may not lead to more credit being extended to smaller companies if they are already highly geared; and that a successful policy must be complemented by interventions aimed at improving SME’s access to equity finance.
Marina Brogi, Valentina Lagasio

SME Funding and the Role of Alternative Non-Bank Finance in Italy


8. SME Credit Access After Basel III. Does Size (and Quality) Matter?

We address the estimation of asset correlation for credit risk assessment in the Italian market and its impact on SME credit access. The empirical evidence demonstrates that assumptions underlying the regulatory capital formula are not substantiated, and benefits received from the respect of granularity could be reduced or even removed. This outcome could depend on the positive relationship between asset correlation and default probability, the negative relationship between asset correlation and size and the positive link between default correlation and default probability. The regulatory impact is that the goal of levelling the playing field could fail, a regulatory arbitrage opportunity could be created and certain firms, clustered by size and industry, could suffer from the credit crunch.
Pietro Vozzella, Giampaolo Gabbi

9. Credit Supply and Bank Interest Rates in the Italian Regions

This chapter offers a synthesis of the characteristics of the demand and supply of credit at the regional level in Italy. The various analyses are conducted using data from the Bank of Italy, ISTAT (Italian National Institute of Statistics) and Prometeia, and cover the 2010–2014 period. In particular, the loan supply for northern regions seems more proportionate and readily responsive to household and firm needs. The interdependence between the dynamics of price formation and credit quality, captured by a vector autoregression for panel regressions, is also significant, with an intensity that varies according to loan maturity and the evolution of economic and financial variables. This result highlights an amplified, negative relationship between interest spreads and credit quality.
Roberto Malavasi, Mauro Aliano

10. Corporate Bonds for SMEs: A Study of Italian Minibonds

Starting in 2013, Italian small- and medium-sized enterprises (SMEs) can issue so-called ‘minibonds’. Such an instrument allows firms to diversify their funding sources, as they primarily rely on banking channels. By combining firm-level data gathered from Aida, supplied by Bureau van Dijk, with hand-collected data from specific firm reports, a quali/quantitative analysis is offered of firms issuing minibonds from January 2013 to June 2015. This study demonstrates that the observed firms differ not only in operating conditions and issuance motivations but also in their financial and economic characteristics. Finally, we offer some policy implications, aimed at improving the ability of such financial instruments to satisfy SME financial needs.
Roberto Malavasi, Giuseppe Riccio, Mauro Aliano

11. Using Open-End Mutual Fund Resources to Finance SMEs: The Potential Market Share of ELTIFs

The Italian asset management sector is in a rather favourable period, and open-end mutual fund AUM levels have reached a record value of 818 billion euro (+95% from 2011 to 2015). This increasing demand for open-end mutual funds from retail investors has been motivated by a search for more interesting returns under conditions of mostly zero/negative interest rates and by the decreasing dependence of commercial banks on bond funding. However, how much of these financial resources are used by mutual funds to finance SMEs? This topic should be of great interest to researchers and authorities, especially in the current period of credit-crunching and with the birth of a new investment vehicle, ELTIFs, which are specifically designed to stimulate SME financing.
Fabrizio Crespi


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