The financing capacity of non-financial corporations and the recovery:
What can Europe learn from the US?
Alexander Popov
(European Central Bank)
September 5th, 2014
Banco de Portugal
Disclaimer: The opinions expressed are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem
1
US vs. Europe: The case of unemployment
•
Unemployment always lower in the US…
• Both before and after the crisis
• Recovery in the US, deterioration in Europe
• 6.2% vs. 11.5% in July 2014
2
US vs. Europe: The case of unemployment
•
… however:
• Low unemployment pre-2007 masked by housing boom („unskilled males“ story, Hurst
et al., 2013)
• High unemployment in Europe driven by distressed countries
• 25%+ in Greece and Spain vs. 5% in Germany, 2.4% in Denmark and 0% in
Monaco
• Low current US unemployment due to people dropping out of the labor force
• Stop looking for a job, retire early, stay in school longer…
3
US unemployment and participation rates
Source: Lott (2014)
4
US vs. Europe: The case of growth
•
GDP growth higher in the US
• US back to pre-crisis GDP levels in 2011
• Euro area still below pre-crisis levels
• 4% vs. 0% annual (latest data)
• Jobless recovery in the US vs. jobless non-recovery in Europe
5
Restoring the finance-and-growth link
•
Slow credit growth in Europe
•
Market failure or repricing of risk?
•
Public funding should not crowd out private funding
•
Role of markets in knowledge accumulation and price discovery (Hayek, 1945)
• Holistic approach!
• Financing NFCs
• Restoring (creating) conditions for markets to do their job
• Banks, VC, corporate debt, crowdinvesting
• Public – private initiatives (PPIs)
• Reviving credit growth in an environment of bank deleveraging
• Unlocking housing wealth for productive purposes
• Structural problems (labor markets)
• Demand side (private debt)
6
NFCs and housing
• Housing an increasingly important asset in the industrialized world
• 60% of US personal wealth
• Housing value 100% of GDP in the US, 400% of GDP in Switzerland
• Demand-driven unproductive competition for scarce urban residential assets
• Bankers, politicians, and voters alike love housing booms
• Rational for regulation?
• Externalities (pricing-out, housing-bust-driven financial crises, credit misallocation)
• Increase in mortgage credit = decline in business credit (Goldstein et al., 2014)
• But aggregate utility may go up even though many people worse off
• Home-equity-borrowing channel of entrepreneurship (Corradin and Popov, 2013)
• Unlock productive potential of European housing wealth (Schmaltz et al., 2013)
• US mortgage credit intermediation takes place in capital markets (securitization)
• 5 German Landesbanken exposed to US housing market bailed out in 2007 and 2008
7
NFCs and banks
400%
• European banking system large than US one
• Assets / GDP
• Similar for Loans / GDP
EU6 (DE+UK+IT+ES+NL+BE)
300%
US
JP
200%
100%
0%
• Bank credit more skewed towards housing
1880
1900
1920
1940
1960
1980
2000
• In some countries, credit to housholds constitutes up to 80% of all credit (e.g.,
Netherlands)
• Investment in housing up to 80% of total investment pre-crisis (e.g., Ireland)
• Less than 50% in the US
• European banks have higher leverage
• Top 8 European banks need to raise €140 bln. to meet a 5% Tier 1 requirement,
• Compared to €25 bln. for the top 8 US banks
• Tightening standards since 2007:Q2, „continued easing“ in US (BLS and LOSBL)
8
NFCs and banks
• Europeans do not fail many banks
• Lack of resolution policy as a
barrier to exit
• Single Resolution Mechanism
150
Number of resoluved banks
• Problem 1: Leniency of supervisors
EU
US
100
50
0
2008
2009
2010
2011
2012
• Problem 2: Large European banks operating across national regulatory regimes
• Pushing risk away from where they are squeezed most (Ongena et al., 2013)
• Single Supervisory Mechanism
• Problem 3: Stress tests fail to account for what markets are currently worried about
• Dexia was bailed out two months after it passed a stress test in the summer of 2011
• Criticial role of Asset Quality Review
9
NFCs and banks
• Have banks been better at financing SMEs in the US?
• We don‘t know! SBF disconnected in 2007
• QE affected asset prices (Krishnamurthy and Vissing-Jorgensen, 2011)
• Effect on bank lending (entreprise credit)?
• We do know a fair deal about SME financing in Europe
• Ferrando et al. (2013): credit supply to SMEs in stressed countries deteriorated in
2010, short-lived improvement after the OMT announcement
• Sovereign debt crisis weighed heavily on the bank lending channel
• US likely spared, except for subsidiaries of European banks (Ivashina et al., 2012).
• Sovereign crisis made possible by the CRD
• Zero risk weight on sovereign debt
• Sovereign bonds excluded from the 25% limit on large exposures
• Investment in sovereign debt crowds out corporate investment (Becker and Ivashina,
2014)
10
NFCs and corporate bonds
• Financial structure vastly different
• Bonds market much smaller in Europe
• A number of potential reasons
• European corporate landscape SME-dominated,
small firms financing soft information-intensive
• Uncertainty, default risk (Del Fiore and Uhlig, 2011)
• Differences in legal and institutional settings (La
Porta et al., 1997)
• Would be nice to develop! But…
• … legal reform (e.g., bankruptcy law) still a
national discretion
• Experience with jump starting corporate bond
markets mixed (e.g., case of Korea)
11
NFCs and VC
• US VC market deeper and more sophisticated than European one
• Over 1998-2008: 56,403 deal worth 544.4 bln in the US vs. 21,413 deals worth 97
bln. in Europe
• Over 1998-2008: VC/GDP 0.082% in US, 0.026 in Europe
• We all love the „Sillicon Valley myth“
• VC conducive to innovation (Kortum and Lerner, 2000) and new business creation
and growth (Samila and Sorenson, 2011)
• … but the model appears to be broken
• US VCs outperformed public equity in the 1990s but underperfomed in the 2000s
(Harris, Jenkinson, and Kaplan, 2012)
• 62% of US VC funds fail to exceed returns from public markets (Kaufman
Foundation, 2012)
• Learning form the mistakes of US Limited Partner investment model
• Do not allocate imvestment to size classes (large funds more often underperform)
• Do not invest based on internal rate of return measures (misleading/not persistent)
12
NFCs and crowdinvesting
• Relatively new source of entrepreneurial finance (since 2007 in Europe)
• Definition: provision of financial resources through an open call (though an internet
oprtal) to support project or firm
• Usually through selling securities to the „crowd“
• Rapidly growing
• 21 new portals in 2013, 261 successful campaigns, €59 mln. raised
• Success stories: Atabio (biotech firm developing drug against antibiotic-resistent bacteria)
• Securities regulation
• No need to comply with registration requirements if the public offering does not
exceed €5 mln.
• National discretion for lower levels (€100,000 in Germany, €2.5 mln. in
Netherlands)
• Fragmentation
• Regulation of cross-border offers murky
13
NFCs and PPIs
• Channeling public money through public and private entities
• KfW model
• Raising funds in capital markets
• Debt guaranteed by German government („safest bank in the world“)
• Cost advantages
• Target housing/energy, SMEs, microfinance
• To be mimicked in the future
• Already in Spain, forthcoming in Greece and Portugal
• Juncker‘s € 300 bln. investment plan for the re-industrialization of Europe
• Marshall Plan € 160 bln in 2014 euros
• Universality? (Mittlestand industrial champions)
• Collateral and project quality? (scramble for „good“ firms)
14
Demand, labor markets, and private leverage
• Leverage of euro area SMEs not higher than that of US SMEs
• Demand for customers most pressing problem for Euro SMEs
• Reviving demand may be more important than fixing finance
• Labor rigidities (two-layer labor markets)
• Sustaining welfare state undermining investment?
• Education / Training
• Private leverage
15
Conclusion
•
Mobilizing investment through a number of markets
• Unlocking housing wealth
• Reviving bank lending
• Difficult at times of deleveraging
• ECB‘s asset buying program?
•
Capital markets
•
•
•
Legal and regulatory impediments at national level
PPIs
Labor market governance
• Allowed Germany to go from „sick man of Europe“ to superstar (Dustmann et al.,
2014)
• Training for the jobs of tomorrow
• Promoting demand
16