Credit where credit's due

For what seems a lifetime, policy-makers and regulators have worried over the issue of funding for small and medium-sized enterprises (SMEs).

Access to credit is a long-standing problem in most economies, and SMEs are heavily reliant on bank lending. Given that SMEs make up the backbone of the economy in terms of job creation, output and innovation, this acts as a constraint on economic progress. Furthermore, big companies start small: tomorrow’s giants are among today’s SMEs that get the right backing.

There has been no shortage of attempts by authorities in different countries to boost the flow of credit to SMEs. Some have involved the public sector sharing the risk of lending to smaller businesses, or providing commercial banks with public funding on condition that the borrowers will be SMEs.

Coming from another angle, investors have been offered tax breaks to buy shares in smaller enterprises, including generous write-off provisions for ventures that do not work out and exemptions from taxes on capital gains.

In all cases, the results have been mixed, to put it mildly, not least because policy-makers are forever closing what they consider to be loopholes opened up by the different incentives that they created.

Now, however, it seems that the euro-zone may inadvertently have hit on an effective, if roundabout, partial solution to the problem as a by-product of the European Central Bank’s Corporate Sector Purchase Programme (CSPP). Put simply, our research suggests that when the ECB buys bonds issued by big companies under the programme directly at their issuance, the effect is to deprive the banking sector of a sizeable piece of the lending business, prompting the affected banks to seek out new customers in the small business sector.

As we shall see, however, whether these new banking relationships have a long-term future is another question, as is the issue of whether the benign effects of the CSPP could be replicated to the lasting benefit of SMEs.

What is the CSPP?

The programme was launched by the ECB in June 2016 to increase inflation, in response to the sovereign crisis in Europe and following the 2007-2009 financial crisis. Previous measures had included negative interest rates and the purchase of certain debt instruments issued by banks.