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….

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Loans under EUR 1 mn - GER, FRA, ITA, SPA

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… on spreads between large and small loans ...

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Spread large - small loans

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... 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/