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European SMEs have been among the primary casualties of the credit crunch that has gripped much of Europe since the crisis of 2007-8 and the subsequent European sovereign debt crisis of 2011-12. Banks’ attempts to rebuild their balance sheets and meet stringent new capital requirements have led them to scale back their lending. Liquidity requirements and moral suasion from governments have led many European banks to substitute investments in their national governments’ debt for corporate lending. The result has been high lending spreads and rejection of many loan applications for SMEs particularly in periphery countries.
A possible safety valve for the pressures imposed on European banks is securitisation. Prior to the crisis, SME-backed securitisation was the second largest sector by volume (after residential mortgage-backed deals) of the European securitisation market. Securitisation offers banks the possibility of shifting capital intensive assets such as SME loans off balance sheets.
For several reasons, however, the channel of securitisation has effectively been closed. Since the crisis, new issues of European SME-backed securitisations have almost all been aimed at creating securities that banks can pledge to central banks to secure funding. Volumes of European SME-backed deals that have been distributed (as opposed to retained) have been very low since 2007.
This note (i) describes the financing pressure on European SMEs stemming from shortages of bank capital, (ii) explains how this could be alleviated by securitisation, (iii) sets out the impediments to the revival of the securitisation market in Europe and then (iv) suggests some practical policy solutions.