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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 http://reltif.cepr.org/ policy issues (the Green Paper) 2. Commissioning research on the issues identified in the first stage and producing a final report (the White Paper) 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… Jan00 Aug14 Mar14 Oct13 May13 Dec12 Jul12 Feb12 Sep11 Apr11 Nov10 Jun10 Jan10 Aug09 Mar09 Oct08 May08 Dec07 Jul07 Feb07 Sep06 Apr06 Nov05 Jun05 Jan05 Aug04 Mar04 Oct03 May03 Dec02 Jul02 Feb02 Sep01 Apr01 Nov00 Jun00 ….on loan rates…. 8.00 Loans under EUR 1 mn - GER, FRA, ITA, SPA 7.00 6.00 5.00 GER SPA FRA ITA 4.00 3.00 2.00 gen-00 set-03 mag-14 gen-14 set-13 mag-13 gen-13 set-12 mag-12 gen-12 set-11 mag-11 gen-11 set-10 mag-10 gen-10 set-09 mag-09 gen-09 set-08 mag-08 gen-08 set-07 mag-07 gen-07 set-06 mag-06 gen-06 set-05 mag-05 gen-05 set-04 mag-04 gen-04 2.5 mag-03 gen-03 set-02 mag-02 gen-02 set-01 mag-01 gen-01 set-00 mag-00 … on spreads between large and small loans ... Spread large - small loans 3.5 3 GERMANY SPAIN FRANCE ITALY 2 1.5 1 0.5 0 ... 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/