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RESTARTING EUROPEAN LONG-TERM INVESTMENT
FINANCE
Andrea Polo (UPF, Barcelona GSE)
CEPR Financial Regulation Initiative
London, 30 September 2015
Key issues
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 lack of investments due the structure and performance of the financial system? Or is it a problem of low demand for capital?
Even if it is supply: is the problem transitory or structural?
Lack of clear diagnosis could lead to unjustified policy prescriptions that might not work and might even end up exacerbating problems
The project (RELTIF)
Assonime and the CEPR are jointly organising a research programme on corporate financing in Europe to advance our understanding of issues relating to the financing of corporations and to provide evidence on the policy issues
Two stages:
1. Bringing new stylized facts and identifying policy issues (the Green Paper)
2. Commissioning research on the issues identified in the first stage and producing a final report (the White Paper)
http://reltif.cepr.org/
Today
Some stylized facts
Open policy issues
New substantial research programme
Fact no. 1
Large differences between SMEs and large companies but…
Differences across countries are even larger
Differences in firms’ profitability,…
… capitalization by country…
….on loan rates….
2.00
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Jan0
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Apr01
Sep0
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Feb0
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Jul02
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May03
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Jan0
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Jun0
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Nov
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Feb0
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Jul07
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Aug0
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Jan1
0
Jun1
0
Nov
10
Apr11
Sep1
1
Feb1
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Jul12
Dec12
May13
Oct13
Mar14
Aug1
4
Loans under EUR 1 mn - GER, FRA, ITA, SPA
GER
SPA
FRA
ITA
… on spreads between large and small loans ...
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0.5
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1.5
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Spread large - small loans
GERMANY
SPAIN
FRANCE
ITALY
... however, generalized decrease in borrowing
Fact no. 2
Overall little shortage of long-term finance: Some reduction in long-term loans but large
firms have increased bond issuance and secondary public offerings
However, for SMEs the reduction of bank loans was stronger and they did not have access to alternative market sources
Long-term finance (% GDP)
Source: Grande & Guazzarotti (2014)
Capital market financing of firms in Europe
Source: OECD
Bank loans & security funding of European firms
Year-on-year change % of GDP. Source: ESRB Report no. 2, 2014
Credit availability reported by European firms, by size
Fact no. 3
Also the demand of credit drops: 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 standards & demand for credit in the EZ
Credit standards & demand for credit, by country
OPEN QUESTIONS
Demand vs. Supply
Convicing evidence that supply played an important role at the beginning of the crisis
After 2009, are low investments due to shortage of funds or insufficient demand?
What is the role of debt overhang?
Intermediation and regulation
From 1996 the EU banking system doubled but today only 15% of assets is made by loans to non-financial corporations (increase in loans to households and investment in securities)
Did regulation discourage loans to SMEs and favour other investments?
What is the impact of higher capital requirements?
Governance
Poor corporate governance factors may render the distinction between demand and supply moot Poor cg of banks may have made banks more inclined to
engage in excessive risk taking (trading vs. landing) Poor cg of large firms may make them reluctant to engange
in long term investments Poor cg of SMEs makes them reluctant to attract new
outside investors
We may need to go beyond the traditional identification problem to understand the underlying causes of low levels of long-term investment
New substantial research program
Call for proposals 14 projects selected 41 researchers from the World Bank, the
ECB, the EIB, the Bundensbank, the Bank of Italy and 18 academic institutions
Intermediary workshop in January and final in July 2016
New substantial research program A few examples:
Real effects of unconventional monetary policy Trading and lending in banks Rationales for publicly supporting the financing
of SMEs. Direct lending or risk sharing? Impact of credit guarantee schemes on SMEs Impact of implementation of innovative forms of
SME financing Impact of asset encumbrance levels on bank
funding costs Impact of cost of capital on bank lending
SEE YOU NEXT YEAR FOR THE RESULTS...
http://reltif.cepr.org/