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Less lending and service from banks?

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SMEs lending services missing from banks but advisers can arrange
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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 truly risk-free sov­er­eign debt, entails less risk of blame than adequately ana­lyse and assume risk of a startup.

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