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

Such fears have also been echoed elsewhere, for
instance by the European Investment Bank which
recognises that consolidation in national banking
markets may be detrimental to SME lending “since
there is evidence that large banks devote a lesser
proportion of their assets to small business loans
in comparison to small, often regional, banks” 358 .
The EIB also highlights the fear that SME lending
could be impacted by the evolution of capital
markets and institutional investors competing with
banks for savings in the economy, as they commit
less of their lending to SMEs than banks do 359 .
Anecdotal evidence of the fear that large commercial
banks in Europe could in fact be cutting down their
SME lending is highlighted by the European
Commission, citing the German financial press 360 .
It adds in the same paper that “even in those countries
where the banking sector is characterised by few
banks with limited networks, individual local banking
relationships remain important [in SME funding].
In the UK in 1999, 70% of small businesses visited a
branch at least weekly and 8% visited daily”.
Given the above, the existence of evidence
indicating that banking consolidation is likely to
affect access to banking services through branch
rationalisation and/or price increases, and also the
quality of such services through the reduction of
services and/or the loss of customer relationships 361 ,
is a particular concern with regards to the future
funding of European SMEs.
The loss of the customer relationships typical between
SMEs and the types of banks that cater for them, as
described above, has in fact been a significant concern
with regards to SMEs’ access to finance in Europe.
As highlighted above, many SMEs depend, for their
funding, on a close relationship with a bank, allowing
the latter to acquire the kind of expertise about the
firm’s credit-worthiness which it would be impossible
or too costly to obtain otherwise. This kind of
‘relationship lending’ is, according to commentators,
widespread in Europe, especially with SMEs 362 .
The European Central Bank has itself expressed
concern on a decrease of the availability of relationship
lending in Europe. The indicators which it highlights
include a rate of growth of real loans to the private
sector which is below that of output growth, a
phenomenon only observed recently. It adds too that
such a decline coincides with large commercial banks
reducing the scale of their retail banking because
competition from local savings banks has intensified.
Further, it points to evidence that the banks which
have been involved in mergers tend to limit the scale
of their relationship lending activities 363 .
The significance of these observations are further
put into perspective by the ECB, who recognises the
importance of relationship lending as a means of
insulating firms from the effects of changes in the
market interest rates, and hence contributing to a
smoother business cycle. It goes as far as to say that
“this may contribute to explain why business cycle
fluctuations have traditionally been larger in the US
and the UK, where relationship lending is limited, than
in continental Europe, where relationship lending is
thought to be prevalent” 364 .
The extent to which large commercial banks are
retreating from the lending business has been
assessed in Germany by the German savings banks,
which conducted a research among their loan officers
in the spring of 2001. 60% of respondents reported
an unusual increase in demand for new accounts by
SMEs in the preceding three months, giving evidence
of more than 1,800 requests from SMEs as a
consequence of private banks’ withdrawal (through
open refusal or reduced service quality). The research
also revealed that the withdrawal of commercial
banks is most noticeable in rural or structurally weak
areas, and affects especially smaller SMEs 365 .
358 See “SME Finance in Europe: introduction and overview”, EIB Papers, volume 8 n°2, 2003.
359 “SME Finance in Europe: introduction and overview”, EIB Papers, volume 8 n°2, 2003.
360 “Enterprises’ access to finance”, Commission Staff Working Paper, European Commission, October 2001.
361 “Banking Consolidation in the EU: Overviews and Prospects”, R. Ayadi and G. Pujals, CEPS Research Report in Finance and Banking No 34, May 2004.
362 See speech by Otmar Issing, Member of the Executive board of the European Central Bank, at the Second ECB Central Banking Conference “The Transformation
of the European Financial System”, 24-25 October 2002.
363 See speech by Otmar Issing, Member of the Executive board of the European Central Bank, at the Second ECB Central Banking Conference “The Transformation
of the European Financial System”, 24-25 October 2002.
364 See speech by Otmar Issing, Member of the Executive board of the European Central Bank, at the Second ECB Central Banking Conference “The Transformation
of the European Financial System”, 24-25 October 2002.
365 “The future of European retail banking markets”, ESBG research, June 2003.
127