One lesson they have learnt is that stronger banks are not enough. Europe needs a market-based financial system that allocates capital efficiently to households and businesses from Lisbon to Ljubljana — and that means it needs not just a banking union, but a capital markets union, too.
Capital markets can complement the banking sector by offering companies additional ways of financing themselves, and providing households with new ways of investing their savings. Yet Europe’s financial system has traditionally centred on banks, which provide about 70 per cent of European firms’ external financing, with the remainder coming directly from securities markets.
In the US, these shares are reversed. Bank dependence is both a cause and a consequence of the structure of the European corporate sector, which is dominated by small and medium-sized enterprises that cannot access capital markets directly.
The financial crisis has revealed weaknesses in this bank-dependent model. Larger companies with direct access to capital markets have performed better than smaller companies, which have preferred to rely on banks and avoid the costly and onerous process of issuing securities in the financial markets. This makes them vulnerable to a drought of credit when banks find themselves in trouble, as they did seven years ago.
The international regulatory response to the financial crisis, which is intended to make sure that banks are better capitalised and their lending operations more cautious, could in some ways make the predicament of small business worse. Robust banks will strengthen the financial sector as a whole. But bank credit is likely to become less freely available and more costly — to the detriment of those companies and economies that are more dependent upon it.
The solution is threefold: improve the functioning of the banking system itself; develop alternative sources of market funding to allow borrowers access to greater diversity of financing; and develop securitisation markets that allow households and companies better access to capital via banks.
None of this is a substitute for the continuing work of strengthening bank balance sheets or centralising supervisory responsibilities at the European Central Bank.
This, together with rules that give banks more flexibility to shift capital between operations in different eurozone countries, promise to make the banking market more efficient and better at allocating capital.
However, alternatives to traditional bank financing must also become a bigger part of Europe’s future, particularly for small companies that need easier access to funds that allow them to grow and prosper.
© Graham Mather
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article