RESTARTING EUROPEAN LONG-TERM INVESTMENT FINANCE Andrea Polo (UPF, Barcelona GSE) CEPR Financial Regulation Initiative London, 30 September 2015

Key issues  Low growth, low investment, insufficient spend on infrastructure, weak bank lending to the corporate sector, and funding deficiencies of SMEs are all major causes of concern in Europe  Is the lack of investments due the structure and performance of the financial system? Or is it a problem of low demand for capital?  Even if it is supply: is the problem transitory or structural?  Lack of clear diagnosis could lead to unjustified policy prescriptions that might not work and might even end up exacerbating problems

The project (RELTIF)  Assonime and the CEPR are jointly organising a research programme on corporate financing in Europe to advance our understanding of issues relating to the financing of corporations and to provide evidence on the policy issues Two stages: 1. Bringing new stylized facts and identifying policy issues (the Green Paper) 2. Commissioning research on the issues identified in the first stage and producing a final report (the White Paper)

Today  Some stylized facts  Open policy issues  New substantial research programme

Fact no. 1  Large differences between SMEs and large companies but…  Differences across countries are even larger

Differences in firms’ profitability,…

… capitalization by country…

….on loan rates….

… on spreads between large and small loans...

... however, generalized decrease in borrowing

Fact no. 2  Overall little shortage of long-term finance:  Some reduction in long-term loans but large firms have increased bond issuance and secondary public offerings  However, for SMEs the reduction of bank loans was stronger and they did not have access to alternative market sources

Long-term finance (% GDP) Source: Grande & Guazzarotti (2014)

Capital market financing of firms in Europe Source: OECD

Bank loans & security funding of European firms Year-on-year change % of GDP. Source: ESRB Report no. 2, 2014

Credit availability reported by European firms, by size

Fact no. 3  Also the demand of credit drops:  credit availability dropped at the same time (or shortly before) firms’ demand for credit: identification problem!  both dropped much more sharply in Italy and Spain than in France and especially Germany

Credit standards & demand for credit in the EZ

Credit standards & demand for credit, by country

OPEN QUESTIONS

Demand vs. Supply  Convicing evidence that supply played an important role at the beginning of the crisis  After 2009, are low investments due to shortage of funds or insufficient demand?  What is the role of debt overhang?

Intermediation and regulation  From 1996 the EU banking system doubled but today only 15% of assets is made by loans to non-financial corporations (increase in loans to households and investment in securities)  Did regulation discourage loans to SMEs and favour other investments?  What is the impact of higher capital requirements?

Governance  Poor corporate governance factors may render the distinction between demand and supply moot  Poor cg of banks may have made banks more inclined to engage in excessive risk taking (trading vs. landing)  Poor cg of large firms may make them reluctant to engange in long term investments  Poor cg of SMEs makes them reluctant to attract new outside investors  We may need to go beyond the traditional identification problem to understand the underlying causes of low levels of long-term investment

New substantial research program  Call for proposals  14 projects selected  41 researchers from the World Bank, the ECB, the EIB, the Bundensbank, the Bank of Italy and 18 academic institutions  Intermediary workshop in January and final in July 2016

New substantial research program  A few examples:  Real effects of unconventional monetary policy  Trading and lending in banks  Rationales for publicly supporting the financing of SMEs. Direct lending or risk sharing?  Impact of credit guarantee schemes on SMEs  Impact of implementation of innovative forms of SME financing  Impact of asset encumbrance levels on bank funding costs  Impact of cost of capital on bank lending

SEE YOU NEXT YEAR FOR THE RESULTS...