Less lending and service from banks?

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 tru­ly risk-free sov­er­eign debt, entails less risk of blame than ade­quate­ly analyse and assume risk of a startup.

What can I do?