The main findings of our work so far indicate the continuing relevance of the banking sector for SMEs. But this outsized importance may also be seen as a reason for providing SMEs with alternative access to credit, either through the securitization of SME loans by the banking sector or by facilitating the issuance of minibonds as an alternative source for SME financing. Hence, our work shows the challenges but also the possibilities and opportunities for this type of alternative finance for SMEs. In this regard the banking sector can continue to play a vital part for SME finance, a role that was once more demonstrated during the recent covid pandemic in which in many countries the banking sector was mobilized to quickly help grant government-guaranteed loans to affected businesses.
The capital position and the cost of capital of banks play a key role. Banks need to be capitalized well to be able to absorb losses and to continue to finance themselves during downturns but increases in capital requirements will result in commercial lending contractions in the short to medium term. Our work points in two directions. One is that policymakers should allow banks to take their time to increase their capital, especially during bad times, and equally important allow banks to run down some of their capital during these same bad times. In essence, capital should be slowly built during good times. More fundamentally though, and this is the 2nd major finding of our research, is that there should be a re-visitation of the tax deductibility of interest payments, in particular for banks. But removing this tax deductibility banks will not only increase their capital (as equity becomes relatively cheaper vs debt) but also increase their lending to corporations, using the newly acquired “headroom” to engage that category of borrowers where the returns are available but the capital surcharges are incorrectly set too high. But not only for banks would such a removal of tax deductibility be helpful in the long run. Having highly indebted firms and households makes dealing with lockdowns during pandemics for example trickier as policymakers need to account for firms and households that have little or no resilience to deal with such a slowing of income.
Finally, we progressed in investigating the way in which financial innovation affects lending growth. Clearly minibonds referred to earlier belong in this category, but so does mobile banking services and the potentially resultant de-branching of the sector. It is clear that for financial access to more complex financial products by households and SMEs the brick-and-mortar presence by banks can and should continue to play a role. Admittedly some of their usefulness in this regard will also depend on the preferences of the users for real-life meetings and those preferences may have shifted somewhat during the recent lockdown.
The main takeaways:
- Securitization does not need to undermine the engagement by banks in terms of lending to small firms.
- Allowing firms to issue minibonds entails a reduction in bank borrowing that is more that substituted for by market finance.
- Banks offer more often and at lower margins to more concentrated markets, arguably motivated by more profitable refinancing and cross-selling opportunities. Banks also improve their inter-regional portfolio diversification with more attractive offers to regions more complementary to home markets. Choices become increasingly automated, reducing operating costs.
- We show how information sharing makes it more important for banks to move closer to each other rather than closer to their borrowers. This has direct implications for policy makers trading off access to bank credit versus the quality of information on which bank lending is based.
- We demonstrate how bank balance sheets may play a role in the transmission of fiscal reforms to the real economy. In sum, fiscal and financial stability policies may have to be coordinated.
- Increasing capital requirements decreases bank lending in the medium term. Targeting capital requirements may be a relevant way to maximize its impact of reducing only specific bank lending, but it may come at a cost of spillovers by increasing lending to related and other sectors.
In regard to exploitation, the link between scientific findings and policymaking in the realm of banking is maybe more subtle yet no less important than in other parts of the scientific world. Through a variety of interactions (e.g. ECB and Eurosystem conferences; reports for the European Parliament) this work has been presented to policymakers at the highest level. This may have resulted in policies being based on some of these estimates. As the policymaking apparatus is large, it would be unwise and inappropriate to pinpoint to specific outcomes, but I refer to multiple renewals of regular visitor status (ECB), research professorship (Bundesbank), report writing (European Parliament), research visits (Banco de Portugal), key note speeches at Eurosystem conferences as an indirect “proof” of the impact and exploitation of the findings of the six subprojects for policy making purposes in the domains of financial stability and monetary policy making.
My team and I gave many keynotes around the world, dozens of seminars and provided many policy briefs through VoXEU and the SFI
