SME Financing - Impact of regulation and the Eurozone crisis

The UK debate on bank lending to SME's continues to run and run with seemingly entrenched views. This debate is of major importance when we consider that SME's account for 99.6 per cent of private sector businesses and 53.8 per cent of private sector employment in the UK. Therefore the UK’s recovery will to a large extent depend on its SME's leading a return to growth. This in turn depends on their ability to receive stable and sustainable funding for business expansion. A strong SME-led recovery will in turn support financial stability, including bank sector stability.

This independent report by Ares & Co has been commissioned by TheCityUK to look beyond the rhetoric into the factors impacting on banks’ ability to maintain lending to SME's. It provides a clear understanding of the issues at stake coupled with robust analysis, highlighting the impact of raising capital requirements on banks in the course of a recession. It demonstrates that deleveraging will occur when banks are unable to raise fresh capital following changes in capital requirements in a recessionary period – requiring them to adjust their balance sheets by shrinking assets. The report has also reviewed experience in other Member States including Germany, France, Italy and Spain, and reveals a number of differences in SME financing approaches across the EU.

This report poses hard questions for those who make regulatory decisions which impact upon what is sometimes referred to as the ‘real economy’. I would encourage regulators to note the compelling data showing what happens when capital requirements are increased in a recessionary period and to moderate too rapid an imposition of bank capital and liquidity requirements under Basel III and CRD IV. In addition, the UK needs to learn from best practice overseas to ensure that UK SME s enjoy similar advantages to their continental cousins.

Given today’s dependence of SME s on bank lending, non-bank lending to SME's needs to be promoted and encouraged. There are a number of exciting and innovative developments in this area including the growth of peer-to-peer lending platforms and Supply Chain Finance which can facilitate greater market capacity.

We are grateful to our colleagues at Ares & Co for producing this report which provides real insights on SME financing.