WEEKLY COMMENT 26-02-2015
By Barry Edwards
New Plans for Corporate Lending in the EU
The Association for Financial Markets in Europe (AFME) and the Boston Consulting Group (BCG) have produced a survey about the funding differences between the EU and the USA and what they recommend that the EU finance industry and government should do to improve access to finance in Europe. If you click on the link below you can read the survey, which is 68 pages, it is well worth looking at the executive summary which is 9 pages long. You have to download the survey to read it;
The surprising finding is that the amount of bank finance available for SME’s is greater in Europe than the USA but it is not coordinated and is difficult to seek out because of the dispersion created by the different cultures, regulations and languages. It does endorse the claim by banks that the lack of demand in Europe is a key factor to the reduction in investment by companies since the financial crisis. It also states that the availability of venture capital is five times as much in the USA compared to Europe.
The specific industry action steps prompted by the conclusions of this survey include:
- Active support for a stronger EU Capital Markets Union and implementation of specific targets, such as increasing the market capitalisation of European equities as well as the percentage of European funding provided by capital markets instruments.
- Active support for promoting broader understanding of financial markets for borrowers, investors, and other stakeholders. These include, concurrent with publication of this report, the following practical guides for specific categories of issuers identified in the survey: a) helping infrastructure issuers more easily tap various types of infrastructure funding; b) improving the chances of SMEs across Europe to achieve success with loan and equity investment applications and bond issues; and c) development of standardised industry practices for a pan-European Private Placement market (Appendices 3, 4, 5).
- Help promote a responsible equity risk culture for all types of equity raising – important for the development of entrepreneurship, start-ups and growth expansion for jobs creation.
AFME is actively implementing these three steps, and will also be evaluating progress so that further AFME members’ support for European growth remains rigorous.
Lord Hill, the EU Commissioner responsible for Financial Services and Capital Markets Union is currently working on a structure to standardise the rules throughout the EU for the European Parliament to implement. There does seem to be real coordination here between government and the financial industry which can only be encouraging for SME’s in particular.
Another report was released this week by the Cambridge University Judge Business School and Ernst and Young (EY) about the alternative finance market in Europe.
This is the first pan-European study of its kind and the research reveals that the European alternative finance market as a whole grew by 144% last year – from €1,211m in 2013 to €2,957m in 2014. Excluding the UK, the alternative finance market for the rest of Europe increased from €137m in 2012 to €338m in 2013 and reached €620m in 2014, with an average growth rate of 115% over the three years. Including the UK, the overall European alternative industry is on track to grow beyond €7,000m in 2015 if the market fundamentals remain sound and growth continues apace. Currently, the UK is 74.3% of the European market and remains one of the leaders in developing this market.
You can read the full report if you click on the link below, it is 44 pages long and the executive summary is one page only;
The alternative finance market is still very small compared to other more traditional forms of funding but it is changing the whole approach to providing finance to people and companies. As the access to financial databases controlled by the established providers is gradually being opened up by government to this new market, they have the ability to assess more accurately the information about the borrowers that approach them for funding
The report points out that an ecosystem of financial technology firms is emerging and providing tools and services to both alternative finance platforms and investors that was not available previously. This on-line due diligence incorporates all the social media platforms and other databases that people utilise as part of their business promotion revealing a vast amount of data that can be analysed to present a more accurate picture of the conduct of borrowers for the finance market. This is beginning to be utilised by all finance providers as it becomes more sophisticated. The world of finance is changing rapidly and the traditional lenders are realising that the techniques employed by the alternative providers can help them improve their risk profile of potential borrowers allowing them to assess and approve loans much more effectively.
The cooperation and association has already started between alternative finance and the banks; they are looking at making greater use of this new technology for much of the small lending business they generate. This evolution allows the regulators and politicians to create the environment for many more financial institutions to participate in the market increasing the availability of funds for investment to stimulate the growth that is needed.
Since Jean Claude Juncker became President of the EU Commission, the emphasis on standardisation of regulations has become a vital requirement to assist this process and it appears there is full support from all sectors that make the rules within the EU. The reports highlighted above demonstrate that there is motivation from the financial world to engage proactively to improve their provision of funds which is also being supported and implemented by the politicians, especially in Brussels.
That’s all for this week, more observations next week.