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.
- 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.
- 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.
- 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.