Abstract:

The EU financial systems are centered around banks. Also industrial systems are very fragmented and composed by a large number of SMEs (small and medium enterprises). As a matter of fact, SMEs unique source of funding is provided by banks, due to SMEs opacity and lack of tangible assets. This amounts to extreme instability of credit for SMEs that suffer pro-cyclical credit rationing by the banking sector: cut in lending during recession and oversupply of loans during expansion. Given that SMEs are the engine of the growth, especially in EU, it is necessary to explore possible avenues to improve long-term access to bank finance for SMEs.

The objective of this project is how to provide a stable supply of lending to SMEs. The project points to several possible limiting factors.

First, the prudential bank regulation, in particular capital requirements, aimed at mitigating risk in the portfolio of loans may be a limit to the amount of risk absorbed by banks. This may discourage lending to SMEs and in particular to innovative startups. One issue is how to design an optimal prudential regulatory framework to enhance credit by banks to innovative firms without impairing financial stability.

Second, the single regulatory framework designed for the EU banking sector may have unintended consequences for the stability of the banking system and may not be sufficient to avoid a future credit crunch. For instance, will a supranational prudential regulation discourage individual banks from diversifying across countries? The choice to grow domestically may backfire against the objective of the policy, that is, to provide stability to the banking industry.

Finally, the lending policies of banks depend upon the expected liquidation value of NPLs.  However, loans to SMEs are often collateralized loans, whose recovery value depends upon endogenous factors, such as macroeconomic conditions, the degree of product market competition and asset specificities. It is thus important to study how the collateral channel affects the amount of credit to SMEs.

Objectives: The objective of this project is to study how to provide a stable supply of lending to SMEs. The project points to several possible limiting factors for this objective to be achieved.

Prudential bank regulation, in particular capital requirements, aimed at mitigating risk in the portfolio of loans may be a limit to the risk absorbed by banks. This may discourage lending to SMEs and in particular to innovative startups. The sub-project #1 “The right balance between stability and financing innovation for EU bank regulators” aims at studying the optimal regulation to enhance credit by banks to innovative firms.

The single regulatory framework designed for the EU banking sector may have unintended consequences for the stability of the banking system and may not be sufficient to avoid a future credit crunch. This is the subject of the sub-project #2 “Is a supranational banking authority helping the EU single market for banks?” In this sub-project we aim at understanding what is the impact of the supranational prudential regulation on the choice of individual banks between diversification across countries and growing in scale but domestically. This choice may backfire against the objective of the policy, which is to provide stability to the banking industry.

Finally, the lending policies of banks may be harmed by factors affecting the liquidation value of NPLs. SMEs obtain loans provided that they post enough collateral to the bank. However the expected value of the collateral, which is critical to obtain a loan, may be too low due to endogenous factors. For instance the lack of future buyers due to the absence of rivals in the industry or a high degree of specificity of the productive asset used as collateral. The sub-project #3 “The market for collateralized assets and access to credit for SMEs” is devoted to the study on how to boost credit for SMEs by intervening on the collateral value of productive assets.