Who Takes the Risks for Funding SMEs?

FROM THE EDITORIAL DESK

Is Special Treatment for SMEs Warranted?
by Giorgio Barba Navaretti, Giacomo Calzolari and Alberto Franco Pozzolo

Numbers
by Maria Teresa Trentinaglia

Institutions
by Maria Teresa Trentinaglia

A bird eye (re)view of key readings
by Maria Teresa Trentinaglia

LEADING ARTICLES

Issues in SME Access to Finance
by Gregory F. Udell

Matching demand and supply in SMEs financing
by Carmine Di Noia, Alexandra D’Onofrio and Alberto Giovannini

How Relationships Can Reduce Risk in Small Business Lending
by Robert DeYoung

Public Credit Guarantees and Access to Finance
by Juan Carlos Gozzi and Sergio Schmukler

QUESTIONS & ANSWERS

Banks’ bail-out and a conditionality clause on SMEs support
by Rym Ayadi

Tackling SMEs asymmetric risk: the EIB Group approach
by Debora Revoltella and Helmut Kraemer-Eis

Market solutions for SMEs lending in the UK
by Lindsey McMurray

 

FROM THE EDITORIAL DESK

Is special treatment for SMEs warranted?

GIORGIO BARBA NAVARETTI, GIACOMO CALZOLARI AND ALBERTO FRANCO POZZOLO

Numbers

MARIA TERESA TRENTINAGLIA

Institutions

MARIA TERESA TRENTINAGLIA

A bird eye (re)view of key readings

MARIA TERESA TRENTINAGLIA

LEADING ARTICLES

Issues in SME Access to Finance

GREGORY F. UDELL
This article examines a number of the most important issues surrounding SME access to finance in a European context. It does this through the lens of the lending channel paradigm first introduced in Taketa and Udell (2007). Using this analytical framework the article examines the impact on SME access to finance from: the introduction of Basel III, government guarantee schemes, SME securitization, and the spread within Europe of venture capital and crowd funding. Special note is given to policy implications and cross country differences within Europe.

Matching demand and supply in SMEs financing

CARMINE DI NOIA, ALEXANDRA D’ONOFRIO AND ALBERTO GIOVANNINI
In the aftermath of the crisis, we are dealing with an issue of mismatched demand and supply in SMEs financing, that the traditional lending technologies and actors seem not able to overcome. In this essay, we have summarized the main actors, technologies and informational issues involved in the SMEs financing. On one side, there are the banks who are typically the originators of loans, and follow the traditional banking technology. On the other side, there is the entire investor community, that is made up of new lending entities, like shadow banks, in a broad sense, but also other private and public agents. A solution to the mismatched demand and supply in SMEs financing requires at the same time a diversification both of actors and of technologies used in the financial markets.

How Relationships Can Reduce Risk in Small Business Lending

ROBERT DEYOUNG
This essay summarizes the results from three recent research studies on small business lending in the U.S.  Each of these studies provides evidence for considering the question “Who takes the risks for funding SMEs?”  The risks associated with funding small businesses are borne by numerous factions in our societies, including but not limited to entrepreneurs, bank lenders, and taxpayers.  The incidence of risk-bearing across these factions varies with the business cycle, with innovations in lending technologies, and with differences in social infrastructure.  Overall, the level of risk is lower when bank-borrow relationships are stronger.

Public Credit Guarantees and Access to Finance

JUAN CARLOS GOZZI AND SERGIO SCHMUKLER
Public credit guarantee schemes have gained popularity as a tool to try to increase access to credit for firms perceived to be financially constrained, typically small and medium-sized enterprises. This paper discusses the potential relevance of these schemes by providing a brief overview of their use around the world and reviewing some important design features. The paper also presents a brief conceptual discussion of the role of public credit guarantees in increasing access to credit and the rationale for government intervention. Public credit guarantee schemes can constitute useful mechanisms for increasing access to finance for certain groups of borrowers, but their success and financial sustainability hinge on proper design. Moreover, rigorous evidence on the impact of these schemes is still scarce. More in-depth evaluations that jointly take into account financial sustainability and (financial and economic) additionality are needed, as well as an assessment of credit guarantees against alternative policy instruments.

QUESTIONS & ANSWERS

Banks’ bail-out and a conditionality clause on SMEs support

RYM AYADI
Despite the discount factor for SMEs lending introduced in the CRR directive, SMEs access to credit may still not be sufficiently enhanced. Also, this preferential weight may even raise a potential distortion of the risk profile of SMEs. This Q&A section discusses the alternative measures undertaken by EU member states to alleviate the funding constraints to SME lending by banks. More specifically, it investigates the role on Small Business Lending of a conditionality clause in granting State aid.

Tackling SMEs asymmetric risk: the EIB Group approach

DEBORA REVOLTELLA AND HELMUT KRAEMER-EIS
Limited access to finance is still a major concern for many European SMEs, and tighter regulatory capital requirements, as well as the accumulation of non-performing loans, have strongly reduced banks’ capacity to extend new lending. This Q&A section discusses which measures are effective in improving banks’ risk taking capacity and in providing SMEs with alternative financial instrument. Also, this section provides a useful insight into the EIB Group activities in supporting SMEs access to finance.

Market solutions for SMEs lending in the UK

LINDSEY MCMURRAY 
This Q&A section starts with the description of the impact of bank regulation on SMEs lending, stressing the urgency of dealing with the issue of Non-Performing-Loans. It then discusses the solutions adopted, and their working mechanism, in the UK to overcome the informational barriers that limit SMEs access to finance.