Restarting European LongTerm Investment Finance
Colin Mayer
18 March 2015
Key Issues
2
 Low growth, low investment, insufficient spend on infrastructure,
weak bank lending to the corporate sector, and funding deficiencies
of SMEs are all major causes of concern in Europe
 Is the source of the investment deficit in the structure and
performance of the financial system? Or is it rather a problem of
low demand for capital?
 Even if it is supply rather than demand for finance, then there is a
question of whether the problem is a transitory one that is slowly
being resolved over time as the effects of the financial crisis fade, or
a structural one that will persist – as a consequence of new
regulation and changes in intermediaries business models
 Lack of clear diagnosis of the financial crisis entails a risk of Europe
hurtling into a series of unjustified policy prescriptions that
might not work and might even end up exacerbating rather than
alleviating problems
Stylized Facts
3
 The European corporate sector has decreased its net borrowing,
and in some countries has become a net supplier of funds to the
financial system; while capital markets share, relative to banks,
has increased, with a large rise in corporate bonds
 However, SMEs, with limited access to capital markets, remain
highly dependent on bank finance, and have seen credit declining
markedly; the financial crisis has also left part of the system
overleveraged, with their debts encumbering banks’ balance
sheets and banks’ ability to provide fresh finance
 The scarcity of finance for SMEs may have been aggravated by
regulation – toughened Basel III capital requirements penalize
lending to the corporate sector
 Low investment and the decline in equity financing may reflect
defects of the governance of companies and financial institutions
– short termism – as well as undesirable changes in the
intermediation chain (the role of asset managers)
The Project
4
• Assonime and the CEPR are jointly organising a programme of
research, supported by Emittenti Titoli, on corporate financing in
Europe to advance our understanding of issues relating to the
financing of corporations – especially European corporations – and
to provide evidence on the policy issues that are at the forefront of
ongoing debates
• The research programme is divided into two stages:
• in the first stage, the programme is identifying policy issues
that are at the forefront of current debates, in particular those
that lend themselves to academic analysis and can be informed
by economic research
• The second stage is to commission research on the issues
identified in the first stage and to produce a final report (the
White Paper) based on the accumulated evidence
• This is the Green Paper based on the first stage
Fact no. 1
5
 Large differences between companies:


across countries

North vs. South

Germany vs. other euro zone (EZ) countries
between large and small companies
Differences in firms’ profitability,…
6
……return on equity……
7
….in their capitalization by size…
8
… and by country…
9
Aug14
Mar14
Oct13
May13
Dec12
Jul12
Feb12
Sep11
Apr11
Nov10
Jun10
Jan10
Aug09
Mar09
Oct08
May08
Dec07
Jul07
Feb07
Sep06
Apr06
Nov05
Jun05
Jan05
Aug04
Mar04
Oct03
May03
Dec02
Jul02
Feb02
Sep01
Apr01
Nov00
Jun00
Jan00
….on loan rates….
10
Loans under EUR 1 mn - GER, FRA, ITA, SPA
8.00
7.00
6.00
5.00
GER
SPA
FRA
ITA
4.00
3.00
2.00
gen-00
set-03
mag-14
gen-14
set-13
mag-13
gen-13
set-12
mag-12
gen-12
set-11
mag-11
gen-11
set-10
mag-10
gen-10
set-09
mag-09
gen-09
set-08
mag-08
gen-08
set-07
mag-07
gen-07
set-06
mag-06
gen-06
set-05
mag-05
gen-05
set-04
mag-04
gen-04
2.5
mag-03
gen-03
set-02
mag-02
gen-02
set-01
mag-01
gen-01
set-00
mag-00
…on spreads between large and small loans..
11
Spread large - small loans
3.5
3
GERMANY
SPAIN
FRANCE
ITALY
2
1.5
1
0.5
0
…..net financing costs…..
12
… in their net financial position …
13
… and mix of external & internal finance
14
Internal financing
35
Germany
Spain
External financing
France
Italy
Euro Area
30
25
20
15
10
5
0
-5
before post
crisis crisis
before post
crisis crisis
before post
crisis crisis
before post
crisis crisis
before post
crisis crisis
Fact no. 2
15
 Overall little shortage of long-term finance:

firms have increased their capitalization (E/A)

large firms have increased bond issuance

BUT small and medium firms are still bank dependent

… and bank loans are very cyclical, while bond issuance
is more stable and counter-cyclical
Composition of EZ firms’ liabilities (% GDP)
16
180
160
140
120
100
80
60
40
20
0
Equity
Long-term Loans
Long-term Securities
Short-term Securities
Short-term Loans
Capital market financing of firms in Europe
17
Source: OECD
Bank loans & security funding of European firms
18
% of GDP. Source: ESRB Report no. 2, 2014
Fact no. 3
19
 Bank loans contracted sharply in the crisis:


especially for small and medium firms
credit availability dropped at the same time (or shortly
before) firms’ demand for credit: identification problem!

both dropped much more sharply in Italy and Spain than
in France and especially Germany
Credit availability as reported by EZ firms
20
Source: ECB Survey on Access to Finance for Enterprises.
Credit standards & demand for credit in the EZ
21
Source: ECB Bank Lending Survey.
Credit standards & demand for credit, by country
22
Source: ECB Bank Lending Survey.
Summary of observations
23
 Substantial variations in circumstances across countries and firms
 Differences between northern and southern Europe
 Differences between Germany and other euro countries
 Differences between small and large companies
 Overall little evidence of a shortage of long-term finance
 Many companies increasingly in financial surplus
 Those that have access to bond markets face few constraints
 Source of countercyclical finance in comparison with bank finance
 In contrast, financial problems particularly serious for SMEs
 But even here not clear that supply rather than demand for finance
 Some evidence of supply problems from financial crisis
 But not clear that this is generally the case at other times
Explanations
24
 Information
 Asymmetries of information in SMEs
 Central credit risk registers
 Private sector providers
 Crowd funding/peer to peer lending
 Regulation
 Capital requirements – socially beneficial or raise cost of
finance
 Risk weighted capital requirements
 Solvency II
 Statutory funding objective
Insurers’ financial assets
25
Pension funds’ assets
26
The changing face of UK ownership
27
%
1989 1993 1997 2001 2004 2008 2010
Individuals
20.6
17.7
16.5
14.8
12.8
10.2
11.5
Ins. Cos.
18.6
20.0
23.6
20.0
17.2
13.4
8.6
Pens. Funds 30.6
31.7
22.1
16.1
15.7
12.8
5.1
Other Fin.
Inst.
0.6
1.3
7.2
8.2
10.0
16.0
16.3
28.0
35.7
36.3
41.5
41.2
1.1
Rest of World 12.8
Source: Paul Davies (2014)
Governance
28
 Agency problem
 Short-termism
 Shareholders versus stakeholders
 Conflict between shareholders and creditors in banks
 Followed by debt overhang
 Particularly relevant to SMEs and family firms
 Conflict between continuity of family and dispersed
ownership
Implications
29
 Distinction between demand and supply opaque
 Poor governance may mean few bankable





investments
Large companies have little demand
Small companies unable to convince lenders
Poor governance of banks undermines supply
Relations between borrowers and lenders key, e.g.
between German banks and SMEs
Presence of long-term anchor investors important
Policy
30
 Determine underlying causes
 Identify appropriate remedies
 Evaluate policy initiatives
 Central banks through quantitative easing
 Jean-Claude Juncker €300bn investment programme
 Seeking to expand SME lending
 Are they appropriately targeted: e.g. could
strengthening bank corporate governance exacerbate
risk taking?
 Importance of relations between public, private,
financial and corporate sectors
Questions
31
 Have we identified the right issues?
 Accurately documented the current position?
 Comprehensively covered relevant literature?
 Determined correct possible solutions?
 Suggested appropriate research and policy agenda?