In order to comply with Basel III adequacy rules banks are further deleveraging impacting negatively lending to SMEs.  The issue is that SMEs are classified as higher risk-weighted assets.

Banks have pulled back their corporate lending in nearly all Eurozone countries since mid-2012. But the steepest falls have been in “peripheral” countries, with Spain leading the way as outstanding loans to non-financial companies fell 22 per cent over the period to €651bn.  Lending to small and medium enterprises (SMEs), which account for two-thirds of jobs across Europe and whose health is central to the region’s chances of economic revival, has been hardest hit.  Nor is there any sign of an end to this decline. The ECB warned this month of “continued deterioration” in financing for SMEs, citing the difficulty of procuring loans and a rise in interest rates charged.

SME loans have partly suffered as they require significant capital set aside for potential losses, leading to a “flight to quality” companies among banks.   By contrast, while corporate lending has decreased, banks’ have ramped up their investments in sovereign debt, which requires less risk weighting.  Indeed, Europe’s financial institutions are more exposed to their domestic government bonds than at any time since the eurozone crisis erupted.

At the same time growing numbers of eurozone companies are bypassing banks – their traditional conduits of corporate finance – and tapping bond markets. The year to date has seen eurozone corporations issue €325.2bn in bonds, a near record figure.

Source: Financial Times