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Less lending and service from banks?

SMEs lending services missing from banks but advisers can arrange

Daniel Bruellmann

Daniel is a founder of Arranger

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Banks reduce SMEs lending services. What is happening?

  • Len­ding to non-finan­ci­al cor­po­ra­ti­ons in Euro­pe is decli­ning sin­ce years while much funds are idle and cen­tral banks’ inte­rests low. Banks redu­ce SMEs len­ding ser­vices espe­ci­al­ly in the stres­sed Euro peri­phe­ry with con­se­quen­ces.

  • Qui­te some banks are suf­fe­ring for ear­lier errors of len­ding, which in hind­sight has pro­ved incon­s­i­de­ra­te. Banks equi­ty and Total Loss-Absor­bing Capa­ci­ty has often fal­len below the level nee­ded to absorb poten­ti­al los­ses on exis­ting assets. This makes it pro­hi­bi­ti­ve to extend addi­tio­nal loans. Regu­la­ti­ons con­se­quent­ly beco­me stric­ter and more com­pli­ca­ted. Risk awa­re­ness of bank offi­cers and use of risk manage­ment tools increa­sed. SME len­ding doesn’t look as that an attrac­tive allo­ca­ti­on wit­hin their new risk appe­ti­te, port­fo­lio stra­te­gy, and com­mer­ci­al poli­ci­es.
  • Consequence

  • This has ope­ned oppor­tu­nities for new ent­rants in the mar­ket. Crowd­fun­ding, tra­di­tio­nal and alter­na­ti­ve debt pro­vi­ders, payment ser­vices, bro­kers and all kind of Fin­tech plat­forms are gro­wing. Such alter­na­ti­ves are eating away more reve­nues of banks on pro­ducts like for­eign exchan­ge tran­sac­tions or stock­bro­king, whe­re mar­gins were just huge.
    Arti­fi­ci­al Intel­li­gence opens fur­t­her oppor­tu­nities for boo­m­ing Fin­tech even on tasks such as rela­ti­ons­hip, port­fo­lio manage­ment and SMEs len­ding ser­vices. Banks thus will trans­form them­sel­ves even fart­her towards the­se new lower-cost com­pe­ti­tors or try to inte­gra­te them. An issue with this deve­lop­ment is that such chan­ges requi­re cli­ents’ know­ledge to shop for each pie­ce indi­vi­dual­ly.
  • Outlook

  • Regu­la­ti­on will play an important part in how banks might keep their pri­ma­ry role in money crea­ti­on. In addi­ti­on to taking pre-exis­ting depo­sits of savers, banks lend to bor­ro­wers. This crea­tes depo­sits of new money wit­hin ratio­na­le limi­ta­ti­ons of pro­fi­ta­bi­li­ty, sol­vency and cen­tral banks reser­ves. Bank len­ding with money crea­ti­on might by design remain more effec­tive than the mere inter­me­dia­ti­on of loan­ab­le funds of most alter­na­ti­ve len­ders. But banks must iden­ti­fy and finan­ce worthwhile pro­jects . Worthwhile means in this case that their aggre­ga­te resi­du­al risk of non-repayment is wit­hin equity’s capa­ci­ty to cover and pro­pen­si­ty to risk such los­ses.
    Finan­ci­al reporting stan­dards such as IFRS 9 might have qui­te an influ­ence too on future loan port­fo­li­os and pri­cing.  They will con­si­der in more detail sec­tor, dura­ti­on, col­la­te­ral and rating.
  • Consequences

  • Finan­ci­al pro­ducts and ser­vices are beco­m­ing che­a­per and mar­gins dwind­le. Low inte­rest levels also moti­va­te well infor­med or advi­sed custo­mers to act. They drop often over­pri­ced pro­ducts such as cus­to­dy, FX or most­ly under-per­for­ming active asset manage­ment for che­a­per solu­ti­ons or mana­ge their assets and tran­sac­tions them­sel­ves. Banks thus have to cut ope­ra­ting costs and increa­se effi­ci­en­cy of rela­ti­ons­hip manage­ment, redu­cing also SMEs len­ding ser­vices. Full ser­vice is restric­ted to few cli­ents and focus put on attrac­tive loo­king pro­ducts. It is easy to sha­re many ana­lysts’ con­sen­sus of a lar­ge public com­pa­ny. And so is to extend a mortga­ge with low capi­tal requi­re­ments, until a pro­per­ty bub­b­le bursts. Even just buy­ing not real­ly risk-free sover­eign debt, ent­ails less risk of bla­me than ade­qua­te­ly ana­ly­se and assu­me risk of a start­up.

What can I do?