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

Attempting to explain the absence of interest for
SME securitisation in both France and the UK,
the study comments that for the former, a report
concluded that the absence of interest in the SME
asset class by French banks was attributable at least
in part to the relative funding and capital strengths
of the French banking system. The authors then add
that the same would also hold true for the UK.
The study concludes that public sector activity in
aiding SME securitisation does provide incentives,
though adding that these are not at such a level that
they have noticeably affected market activity across
the EU as a whole, or attracted the attention of banks
that have a wide(r) range of securitisation options.
It adds too that “given the uneven development of
SME securitisation across the EU, it is considered
premature to commit, at this time, other than a
measured share of SME support resources for
securitisation investments. Consequently, flexibility in
the allocation of public resources between various
EU support programmes in SME finance (within a
budgeted total) should be sanctioned so that
resources could be switched to securitisation
investment should the take-up and leverage exceed
current expectations”.
6.2.3.3 Comparison
For SMEs in Europe (defined by the European
Commission as firms of 250 or less employees) and
small businesses in the US (defined by the Federal
Reserve as being firms of less than 500 employees),
banking finance is the most important type of
external finance, mainly in the form of loans, but
also in the form of overdrafts/credit lines. In contrast,
external equity financing represents a small part of
funding for small enterprises in both markets.
In terms of the types of banks which provide SME
loans, commercial community banks in the US and
savings as well as cooperative banks in the EU are
important providers of loans to SMEs, and regard
SME lending as a major area of activity.
There are a number of reasons that explain this,
among which a good knowledge of the local markets,
and the advantage that such banks have over larger,
more centralised, credit institutions in developing
long term relationship lending with borrowers.
Such an approach in banking is often important in
the case of SME loans, as it is frequently the case
that SMEs have little or no collateral or credit history.
A bank that has served a customer over a long period
will have the advantage of already knowing the loan
applicant and his business, and may therefore be
better able to assess the risk in providing a loan to
such a borrower.
Financing SMEs is not only a major activity, and
therefore of importance, for such banks, but it is also
a vital activity in the context of the economies of
both the US and the EU. In the US, small businesses
account for just over half of private sector output
and employment and provide two-thirds to threequarters
of net job growth 372 . In Europe, over
99 % of European enterprises are small and
medium-sized, and they are responsible for two
thirds of the total employment 373 .
The European Central Bank has also recognised
the importance of the type of lending typified by
banks that are important providers of SME loans,
‘relationship lending’, as a means of insulating firms
from the effects of changes in the market interest
rates, and thus important in maintaining a stable
economic cycle.
This explains why so much concern has been
expressed on the future of financing SMEs in the
EU and small businesses in the US. The challenges
to such enterprises are the same in both markets.
The growing concentration of the banking sectors
in both the EU and the US as consolidation has
intensified has led a number of commentators,
not least in Europe the European Central Bank and
the European Commission, to voice concern over the
possible disappearance of the types of banks that
fund enterprises or, indirectly, to express fear of the
loss of the relationship lending methods employed
by such banks to fund enterprises. Evidence of the
(growing) reluctance of large banks to finance
enterprises has also been reported in both markets.
372 “Small Business by the Numbers”, U.S. Small Business Administration, Office of Advocacy, 2002.
373 “Enterprises’ access to finance”, Commission Staff Working Paper, European Commission, October 2001.
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