Access to finance in the euro area: what are SMEs telling us about the crisis? Annalisa Ferrando European Central Bank The economics of small businesses in the aftermath of the crisis. Cross-country analyses and policies Urbino, 21 October 2010 The views expressed are those of the author and should not be attributed to the European Central Bank

2 Outline 1.Presentation of the survey: main characteristics, sample and design, questionnaire, dissemination of results 2.Main findings of the survey Availability and needs of external finance 3.Some preliminary results on the determinants of financing obstacles 4.Conclusions

3 1. Main characteristics of the survey Joint survey ECB - European Commission (DG ENTR) on the “Access to finance of European SMEs” Frequency –Every 6 months: ECB part on latest developments in financing conditions –Every 2 years: full survey (incl. more forward-looking and structural questions) Three rounds have been run so far : –Summer 2009: results refer broadly to first half of 2009 –Winter 2009: results broadly refers to the 2 nd half of 2009 –Summer 2010: between 30 August and 21 September – results broadly refer to first half of 2010 (to be published 22 October)

4 1. Sample size and design Sample: more than 8,500 firms of different sizes in the EU, of which 5,000 firms in the euro area 10% large firms; the rest equally divided among micro (<10), small (10-49) and medium (50-249) Representative: –for each of the largest countries (Germany, France, Italy and Spain); –for industry, construction, trade and services –by firm size categories (4)

5 1. Questionnaire “Structural” information: firms’ size, age, type of ownership, sector, nationality, etc. Information on the financing needs, use of financing, and availability of finance Questions are often: “Over the past six months, has [X] improved, deteriorated, or remained unchanged?” –with [X] economic or financial indicators, access to or needs for financing sources, or other topics

6 1. Dissemination of survey results Report on euro area results published by the ECB on its website (+ report published by the EC) Complete aggregate tables for all variables and various breakdowns (e.g. size, sector, countries) available on the website Third wave will be published 22 October

7 2. SMEs’ most pressing problems in 2009H2 were… Source: ECB, (percentage of respondents)

8 2. External financing needs tended to increase in 2009 External financing needs of euro area SMEs (change over the preceding six months, percentage of respondents) Base: All SMEs. SMEsLarge firms

9 2. At the same time, the availability of external financing remained critical for SMEs Availability of external financing to euro area SMEs (change over the preceding six months, percentage of respondents) Base: SMEs that applied for external financing. Base: Large firms that applied for external financing. SMEsLarge firms

10 2. At country level there is some heterogeneity… Source: ECB. Notes: Pink squares: 2009H1; green circles: 2009H2.

11...which is broadly in line with the evidence from MFI loans Source: ECB, MFI Balance sheet items. Note: annual rate of growth.

12... and is partly reflected in the reports by banks on credit standards Source: BLS ECB. Notes: net percentages of banks contributing to tightening credit standards.

13 2. Main reasons for the deterioration of the availability of external financing for euro area SMEs… Factors having an impact on the availability of external financing to euro area SMEs (change over the preceding six months, percentage of respondents) Base: All SMEs. 1) Mostly, the general economic and firm- specific outlook 2) But some deterioration in banks’ willingness of to provide a loan is noticeable throughout the year 2009

and at country level for 2009H2 Factors having an impact on the availability of external financing to euro area SMEs (change over the preceding six months, percentage of respondents) Base: All SMEs.

15 2. Terms and conditions of bank financing remained tight for SMEs in 2009 Outcome of application for external financing (% change compared with previous six months; % of respondents Terms and conditions of bank loans granted to euro area SMEs (change over the preceding six months, % of firms that applied for bank loans)

16 2. Terms and conditions of bank financing varied a lot across countries in 2009H2 Source: ECB Note: change over the preceding six months, net percentages based on firms that applied for bank loans. Negative sign: impact of the item decreased on net.

17 2. Lending rates to NFCs remain historically low Source: ECB. Note: Small loans (loans up to EUR 1 million) (proxy for loans to SMEs).

18 2. Outlook for 2010: large firms somewhat more optimistic than SMEs Expectations regarding access to finance (change over the following six months, percentage of respondents) SMEsLarge firms Base: All SMEs.

19 2. Some indications for 2010H1 Survey results confirm the timid revival of economic activity with clear signs of improvements for large firms but less favourable situation for SMEs (turnover, profitability). SMEs indicated a slightly more intense use of external sources of finance (overdrafts, credit lines and bank loans). A less severe deterioration in the availability of external financing and a mild increase in financing needs for SMEs → in aggregated terms the gap between needs and availability of bank loans has decreased. High heterogeneity across countries (DE versus ES).

20 3. Determinants of financing obstacles for euro area NFCs Are they different during a financial crisis? The SAFE survey gives us the opportunity to test what firm characteristics are valid predictors of financing obstacles across countries in a period of financial crisis.

21 3 Previous results Measures of financing obstacles using the survey results of the WBES (World Bank) –Beck et al. (2006, 2008) find that age, size (not for developed countries), sector and ownership structure predict financing obstacles. –For five major EA countries, Coluzzi et al. (2009) find age, size (but not always), sectors and economic performance explain probability of financing obstacles. –For Italian firms, Angelini and Generale (2008) find a negative link between financial constraints and firm size but this seems to be a real problem only for a small portion of their sample. More important is the link between financial constraints and firm age.

22 3. Some preliminary results based on 2 nd SAFE wave Age and ownership remain important explanatory variables Mixed results are achieved for size and economic branches. –One explanation would be : the recent financial crisis has been widespread across various sectors and size, outweighing existing structural differences in the access to finance, once controlling for other characteristics. These preliminary results are confirmed –probit regressions at country level/sector level –when we introduce other explanatory variables, such as bank loan applications, –when we consider the interaction between financing obstacles and use of external sources of finance.

23 3. A simple model Probit model FinObst is the response by firm i in country k and indicates access to finance as most pressing problem. Firm characteristics: vector of major firm attributes (e.g. size dummies, sectoral dummies, dummies for turnover and ownership, firm age). Country is a vector of country dummies Only observations with non-missing values on the relevant variables are considered, allowing the number of observations to be kept constant across estimations of the same type.

24 3. Experiencing financing obstacles – The role of firm characteristics Country dummies included, all significant: wrt DE: Negative coeff: Austria, Finland (-0.5) Belgium, France (-0.3) Portugal (-0.2) Netherlands (-0.1) Positive coeff: Italy (0.1) Ireland (0.2) Greece (0.4) Spain (0.5) Cluster robust standard errors in parentheses. Significance levels: *** p<0.01, ** p<0.05, * p<0.1

25 3. A bivariate probit model Investigate the existence of underlying factors that (simultaneously) determine both the experience of financing obstacles and firms’ financing patterns (internal vs. external). Under the hypothesis

26 External finance and financing obstacles – a bivariate probit model country dummies included but not reported Cluster robust standard errors in parentheses. Significance levels: *** p<0.01, ** p<0.05, * p<0.1

27 Conclusions Access to finance was 2nd biggest problem for euro area firms in During 2009, external financing needs have increased but availability has deteriorated. General and firm-specific economic outlook largely blamed for this financing gap. But willingness of banks to provide loans is also highlighted. Outlook for 2010: clear signs of improvements for large firms but still less favourable situation for SMEs. In a period of crisis, most significant determinants of financing obstacles seem to be country and age (rather than economic activity or size). Ownership matters as well.

Thank you for your attention