A comparative analysis of the US and EU retail banking markets - Wsbi

The securitisation process requires a certain level
of standardisation so that the loans which are
packaged into a security can easily be analysed by
investors. The difficulty with securitising small credit
loans however is that loan terms and conditions are
not homogeneous, underwriting standards vary
across originators and information on historical loss
rates is typically limited.
The information problems associated with small
business loans can be overcome or offset to a degree
by some form of credit enhancement mechanism.
However, the more loss protection needed to sell the
securities, the smaller are both the net proceeds
from the sale of the securities and the incentive for
lenders to securitise their loans. Small business loans
are an asset for which the high transaction costs of
providing credit enhancements have made many
potential securitisations unprofitable.
Because relationship lending is based on soft
information that is difficult to observe, verify, or
transmit, it could be said that relationship lending is
in fact antithetical to securitisation 341 .
Most of the small business loans that have been
securitised to date in the US have involved
the guaranteed portion of loans made under the
Small Business Administration’s 7(a) Loan Guaranty
Program 342 . Between 1999 and 2001, roughly $3.2
billion of slightly less than $7 billion of such loans
was securitised.
These securitisations have been fairly common because
they do not involve the risk and information
impediments typically associated with the securitisation
of small business loans 343 . Securitisations of the
unguaranteed portion of SBA 7(a) loans have
been much less common, equalling roughly 10% of
such credit.
With regard to the market for securitisations of
conventional (non-SBA) loans, almost $4 billion in
such loans were securitised between 1994 and 2001.
However, these volumes are small relative to the
total amount of small business loans that could be
securitised.
As of June 2001, banks held roughly $450 billion of
small business loans outstanding, and the 1998 SSBF
suggests that this figure corresponds only to roughly
65% of all small business lending. Therefore, the
total amount of small business loans outstanding was
roughly $700 billion. A small portion of these were
SBA-guaranteed loans. Even though many of these
loans would probably be unsuitable for
securitisation, the relative magnitudes of all small
business loans made and those that have been
securitised indicate that securitisation of conventional
small business loans has been modest 344 .
While government subsidisation of a secondary
market for small business loans could reduce funding
costs to small businesses whose loans are securitised
and increase the total number of small business
loans granted, in some cases, such a policy would
encourage the securitisation of relationship loans
with a resulting loss of relationship benefits. Thus, in
considering such a policy, the social benefits would
have to be weighed against the possibility that many
relationship loans are likely not to be securitised, and
the ones that are securitised may lose many of the
benefits associated with relationship lending 345 .
6.2.3.2 European Union
6.2.3.2.1 The main means of financing SMEs 346
in the EU
No statistics exist in Europe giving details on the exact
proportions of total SME finance that is external
and internal finance or loan and equity finance.
However, it is generally recognised with regards to
SME financing – in spite of the fact that financing
systems in Europe vary between a bank-based
system, as in Germany and Austria, and a market
based financial system, as in the UK – that loan
financing remains very much the main source of
external finance across Europe. Indeed, according to
the European Commission, equity finance is not even
regarded as a financing option by the majority of
European small enterprises 347 .
341 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
342 The Small Business Administration helps secure financing for small businesses. The general SBA loan program is officially known as the 7(a) Loan Guarantee
Program. This means the SBA guarantees business loans rather than makes them.
343 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
344 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
345 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
346 The European Commission defines SMEs, small and medium sized enterprises, as including all enterprises with 250 or less employees, €50 million or less in
turnover or €43 million or less on the balance sheet.
347 “Microcredit for small businesses and business creation: bridging a market gap”, European Commission, December 2003.
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