This document discusses financing options for small and medium enterprises (SMEs) in the European Union. It begins by noting high expectations that Capital Markets Union will help SMEs raise financing as easily as large companies, but questions whether these expectations are justified. It then reviews typical financing sources for SMEs in the United States, the small role of SME securitization in Europe and the US, and problems with the SME bond market in Germany, including fraud allegations and a high default rate. The document concludes by arguing that strengthening small, local banks could better promote SME financing since these banks typically lend more to SMEs and have closer relationships with them.

1. SME FINANCING IN THE EU
Is Capital Markets Union going to deliver?

2. 2
HIGH EXPECTATIONS...
© RWGV | 2015
“help SMEs raise finance as easily as large companies”
“making it easier for companies (including SMEs) to raise capital
throughout the EU while ensuring effective investor protection”
„unlocking liquidity that is abundant, but currently frozen, and putting it
to work in support of Europe's businesses, and particularly SMEs”
(EU Commission, Press Release, 18 February 2015)
... BUT ARE THEY JUSTIFIED?

3. 3
SME FINANCING IN THE UNITED STATES
© RWGV | 2015
0% 20% 40% 60%
Bank Loan
Earnings of the business
Credit cards
Private placement of debt
Venture capital/Angel investors
Private placement of stock
Source: National Small Business Association, Mid-Year Economic Report 2015
"What types of financing has your company used within the past
12 months to meet your capital needs?"

4. 4
SME SECURITISATION
© RWGV | 2015
“securitisations backed by SME loans are only a small proportion of
issuance in both Europe and the United States, and are supported to an
extent in both jurisdictions by publicly funded guarantees”
(Bank of England, February 2015)
„Historically, most of the small business loans that have been securitized
involved the guaranteed portion of loans made under the SBA's 7(a)
Loan Program. (...) Despite this preferred status, the SBA secondary
market also dropped off substantially in September 2008.”
(Federal Reserve Board, September 2012)

5. 5
SME BONDS IN GERMANY
© RWGV | 2015
 2010: „Mittelstandsanleihen“ market incepted
 2015: default rate reaches 17% (more to come?)
 defaults impact 34 corporate bonds, total debt volume: € 1 billion
 mostly retail investors affected (institutional: 10% – 20%)
 fraud allegations
 almost no new issuance
(Sources: Scope Ratings, April 2015; German media)

6. 6
FURTHER DOUBT
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“The benefits [of Capital Markets Union] for SMEs are being oversold”
(U.S. Think Tank Brookings Institution, February 2015)

7. 7
STRENGTHENING SMALL BANKS – WHY? (1/3)
© RWGV | 2015
 small, local banks lend more to SMEs than bigger banks
 small banks are familiar with their business clients and
the regional economy

8. 8
STRENGTHENING SMALL BANKS –WHY (2/3)?
© RWGV | 2015
 business loans at German credit cooperatives and
Sparkassen: €560 billion
10%
28%
0%
5%
10%
15%
20%
25%
30%
Market share
(total assets)
Market share
(SME lending)
German Cooperative Banks
14%
46%
0%
10%
20%
30%
40%
50%
Market share
(total assets)
Market share
(SME lending)
U.S. Community Banks
Sources: ILO, March 2013; FDIC Community Banking Study, December 2012

9. 9
STRENGTHENING SMALL BANKS – WHY? (3/3)
© RWGV | 2015
21 23
13
20
0
5
10
15
20
25
30
35
40
45
USA Germany EU ex
Germany
Number of credit institutions
per 1 million citizens
Credit Unions (U.S.)
Banks (including
cooperative banks,
savings banks)
Sources: FDIC, Credit Union National Association, ECB

10. 10
STRENGTHENING SMALL BANKS BY...
© RWGV | 2015
 ... ensuring proportionality
 ... supporting diversity
 ... easing the administrative burden (e. g. reporting
requirements)
 ... preserving useful established structures (e. g. self-organized
protection schemes)
 ... where necessary: facilitating new market entries

11. 11
THANK YOU!
RWGV
Stefanie Schulte
Communications Officer
Phone: +49 251 71 86–1062
E-Mail: stefanie.schulte@rwgv.de
Twitter: @schulte_stef