Ex-ante assessment of the EU SME Initiative EXECUTIVE SUMMARY ........................................................................................... 8 I. INTRODUCTION ............................................................................................... 15 II. BACKGROUND ................................................................................................ 17 2.1 EU financial instruments under the MFF 2014-2020 ............................................. 17 2.2 Proposal of the SME Initiative ............................................................................... 17 2.2.1 EIB/EIF involvement in the SME Initiative ........................................................... 19 2.2.2 ESIF contributions............................................................................................... 19 III. OBJECTIVES OF THE ASSIGNMENT.......................................................... 21 IV. REPORT ........................................................................................................ 22 4.1 Chapter 1: Analysis of the market gap in accessing bank financing by SMEs ....... 22 4.1.1 SMEs' difficulties in accessing finance ................................................................ 22 4.1.1.1 Access to finance for SMEs .......................................................................................... 22 4.1.1.2 Effects of the crisis on SMEs ........................................................................................ 22 4.1.1.3 Supply side ................................................................................................................... 26 4.1.1.4 Demand side ................................................................................................................. 27 4.1.1.5 Conclusion on supply and demand side ....................................................................... 27 4.1.2 Assessing SME financial gaps ............................................................................ 27 4.1.2.1 Methodology adopted .................................................................................................. 30 4.1.2.2 Analysis of the financing gap ........................................................................................ 31 4.1.3 Expected evolution of SME financing gap ........................................................... 39 4.1.3.1 EU economic outlook .................................................................................................... 39 4.1.3.2 Evolution of the financial conditions of banks ............................................................... 40 4.1.3.3 Developments in Credit Guarantee Schemes .............................................................. 42 4.1.3.4 Developments in SME securitisation market and expected impact of CRDIV/CRR provisions ................................................................................................................................. 42 1 4.1.3.5 Introduction of measures against late payments .......................................................... 43 4.1.3.6 The development of alternatives for bank finance ........................................................ 44 4.1.3.7 Banking Union............................................................................................................... 44 4.1.3.8 Conclusion .................................................................................................................... 45 4.2 Chapter 2: Rationale for policy action and proposed initiative ............................... 45 4.2.1 Rationale for policy action at EU level ................................................................. 45 4.2.1.1 Need for SME policy intervention ................................................................................. 45 4.2.1.2 General justification for public and EU level intervention ............................................. 50 4.2.1.3 EU Added Value – providing support at the right policy level ....................................... 53 4.2.1.4 General principles of EU intervention ........................................................................... 55 4.2.1.5 Legal bases of EU intervention ..................................................................................... 56 4.2.1.6 Positive externalities of EU intervention ....................................................................... 57 4.2.2 Description of the envisaged SME Initiative and its value added ......................... 58 4.2.2.1 Option 1: Joint SME Guarantee Instrument .................................................................. 59 4.2.2.2 Option 2 and Option 3: Joint Securitisation Instruments for both new and existing SME loan portfolios ............................................................................................................................ 63 4.2.2.3 Case studies ................................................................................................................. 69 4.2.3 Analysis of the value added of the SME Initiative ................................................ 73 4.2.3.1 EU policy objectives and consistency ........................................................................... 74 4.2.3.2 Demonstration, signalling, and catalytic effects ............................................................ 74 4.2.3.3 Multiplier effects and economies of scale ..................................................................... 75 4.2.3.4 Capacity building .......................................................................................................... 77 4.2.3.5 Addressing market fragmentation ................................................................................. 79 4.2.3.6 Conclusion .................................................................................................................... 81 4.3 Chapter 3: Consistency with other policy actions and proportionality of the intervention ..................................................................................................................... 82 4.3.1 Initiatives under Structural Funds ........................................................................ 82 4.3.1.1 Existing initiatives under Structural Funds (2007-2013) ............................................... 82 4.3.1.2 Envisaged initiatives under ESI Funds (2014-2020) .................................................... 83 4.3.2 Centrally managed EU financial instruments ....................................................... 85 2 4.3.2.1 EU financial instruments in the current MFF (2007-2013) ............................................ 86 4.3.2.2 EU financial instruments for the next MFF (2014-2020) ............................................... 87 4.3.3 National initiatives ............................................................................................... 93 4.3.3.1 General measures ........................................................................................................ 93 4.3.3.2 Other initiatives by Member States (examples) ............................................................ 96 4.3.3.3 Conclusion .................................................................................................................. 101 4.3.4 EIB Intermediated SME Lending ....................................................................... 102 4.3.4.1 Existing SME lending activities ................................................................................... 102 4.3.4.2 Planned SME lending activities .................................................................................. 102 4.3.5 EIB Group ABS Initiative for SMEs ................................................................... 103 4.3.6 Consistency with other sources of financing...................................................... 104 4.3.6.1 Leasing and factoring ................................................................................................. 104 4.3.6.2 Alternative financing sources ...................................................................................... 104 4.3.7 Proportionality of the envisaged Initiative to the size of the identified financing gap and critical mass of EU level contribution necessary for the initiative ......................... 105 4.3.7.1 Analysis of the prospective market demand for each product ................................... 105 4.3.7.2 Market testing by EIF .................................................................................................. 113 4.3.8 Percentage range of the financing gap of each Member State which may be addressed through the initiative ................................................................................. 124 4.3.8.1 Estimation of gap-reducing financing in each Member State, per product ................. 125 4.3.8.2 Limits of country gap coverage ................................................................................... 125 4.3.8.3 Methodology and assumptions ................................................................................... 125 4.3.8.4 Envisaged impact ....................................................................................................... 126 4.3.9 EU-level contributions to the initiative................................................................ 130 V. ANNEXES .................................................................................................... 131 5.1 Annex 1 to Chapter 1: The SME credit guarantee schemes in the EU ................ 131 5.2 Annex 2 to Chapter 1: The SME securitisation market in the EU ........................ 132 5.3 Annex 3 to Chapter 1: Alternative methodologies to measure financial gaps ...... 134 5.4 Annex 4 to Chapter 1: Measurement challenges and proposed solutions ........... 135 5.5 Annex 5 to Chapter 1: Member State data availability and robustness tests ....... 137 3 5.6 Annex 6 to Chapter 1: Country Fiches ................................................................ 139 5.7 Annex 7 to Chapter 1: Methodological Note: Estimation of the SME Loans Share over total Loans issued to Private Sector ...................................................................... 182 5.8 Annex 1 to Chapter 2: General assumptions underlying the SME Initiative ......... 191 5.9 Annex 2 to Chapter 2: Assumptions underlying the leverage calculations ........... 193 5.9.1 Option 1 ............................................................................................................ 193 5.9.2 Option 2 ............................................................................................................ 194 5.9.3 Option 3 ............................................................................................................ 195 VI. GLOSSARY ................................................................................................. 198 VII. REFERENCES ............................................................................................. 200 4 LIST OF ACRONYMS ABS Asset Backed Securities AECM European Association of Mutual Guarantee Societies CDO Collateralized Debt Obligation CEB Council of Europe development bank CESEE Central, Eastern and South-Eastern Europe CH Cédula hipotecaria CIP Competitiveness and Innovation Framework Programme CLO Collateralized Loan Obligation CRD Capital Requirements Directive EAD Exposure at Default EAFRD European Agricultural Fund for Rural Development EBA European Banking Authority EC European Commission ECB European Central Bank EIB European Investment Bank EIF European Investment Fund EIOPA European Insurance and Occupational Pensions Authority EMEA Europe, Middle East and Africa ERDF European Regional Development Fund ESI European Structural and Investment ESIF European Structural and Investment Funds ESMA European Securities and Markets Authority EU European Union FCT Fonds Commun de Titrisation FEI Financial Engineering Instrument FI Financial Instrument 5 FLP First Loss Piece FP7 7th Framework Programme for Research, technological development and demonstration GDP Gross domestic product HG SME High-Growth SME HLG High Level Expert Group ICO Instituto de Crédito Oficial IMF International Monetary Fund LGD Loss Given Default LTRO Long-Term Refinancing Operation MFF Multiannual Financial Framework MFI Monetary Financial Institution MS Member State NPB National Promotion Bank NPL Non-Performing Loan OECD Organisation for Economic Co-operation and Development OMT Outright Monetary Transaction OP Operational Programme PD Probability of Default RSI Risk Sharing Instrument SAFE Survey on the Access to Finance of SME's in the Euro area SF Structural Fund SFH Société de Financement de l'Habitat SMAF SMEs’ access to finance SMEG SME Guarantee SMESec SME Loan Securitisation SPV Special Purpose Vehicle SRM Single Resolution Mechanism SSM Single Supervisory Mechanism 6 UEAPME European Association of Craft, Small and Medium-sized Enterprises WEF World Economic Forum 7 EXECUTIVE SUMMARY This Staff Working Document has been prepared by the Commission services with input from the EIB and the EIF, and constitutes an ex-ante assessment of the SME Initiative. The SME Initiative has been presented in June 2013 in the Commission's and EIB's joint report to the European Council, to complement and utilise synergies between existing SME support programmes at national and EU level. More specifically, a joint-instrument, blending EU funds available under COSME and Horizon 2020 and ESIF resources in cooperation with EIB/EIF was proposed in view of generating additional lending to SMEs. The Initiative has been endorsed by the European Council both in its June and October meetings and has received a positive opinion by ECOFIN and the EFC. The drafting of the study has been carried out under stringent data and time constraints in order to meet the requirements of the draft Common Provision Regulations, art. 33bis, in relation to ESIF contributions by Member States. For COSME and Horizon 2020 ex-ante assessments have already been carried out. The document is structured as follows: Chapter 1 analyses EU SMEs' difficulties in accessing external finance and estimates the amount of loans that "financially viable" firms would need but cannot obtain from the banking system (the "financing gap"). During the financial crisis, while the reduction in the volume of lending and the worsening of lending conditions has affected all non-financial corporations, it has particularly hit EU SMEs. This credit growth weakening may in itself justify policy measures, aimed at speeding up and strengthening the recovery. However, in order to design specific policy measures, focusing on the causes of credit growth weakening, it was deemed necessary to investigate more in depth the nature of SMEs' difficulties with access credit; this is done not so much by looking at demand and supply side behaviour, but by exploring financial market failures in providing credit to financially viable borrowers. We adopt a statistical methodology – appropriate for the data at our disposal – to gauge the SME "financing gap" at both the EU level, and at Member State level. At the EU28 level, we estimate the proportion of "financially viable" SMEs1 that faced problems in accessing bank financing between 2009 and 2012 in the interval of 0.7%-4.1% of all SMEs to be at approximately 154,000-855,000 SMEs. This figure includes all financially viable SMEs that: i) have been refused a bank loan; ii) have turned down a bank loan, presumably due to the credit conditions; iii) have been discouraged from even applying for a bank loan. By multiplying the average SME loan size by the aforementioned number of financially viable SMEs with problems in accessing loan financing, an EU-wide gap can be quantified within the range of €20 bn to €112 bn, representing the average for the period 2009-2012. In 2012, based on the latest available figures, the EU wide gap decreased to a total of EUR 105 bn, representing EUR 95 bn for non-agricultural SMEs and EUR 10 bn for agricultural SMEs. 1 We proxy the proportion of financially viable SMEs with the proportion of SMEs that have experienced a turnover growth higher than 20% in the previous 3 years (lower bound), or higher than 0% in the previous 6 months (upper bound). 8 BOX 1: ESTIMATED SME LOAN FINANCING GAP - METHODOLOGY AND RESULTS2 This Ex-Ante Assessment builds on the methodology used in previous field studies (most notably Economisti Associati, 2011) and expands it by taking into account Member States heterogeneity at the level of SME access to loan financing. 1. The starting point is the percentage of financially viable SMEs that are unsuccessful in obtaining loan finance. This is computed using the following formula: Unsuccessful SMEs = [SMEs that applied ×(SMEs rejected + SMEs refused)] + SMEs discouraged Where: I. SMEs that applied: share of financially viable SMEs that applied for a bank loan; II. SMEs rejected: share of financially viable SMEs that applied for a bank loan and whose demand was rejected by the bank; III. SMEs refused: share of financially viable SMEs that applied for a bank loan and refused the proposed bank loan because of high interest rates; IV. SMEs discouraged: share of financially viable SMEs that did not apply for a loan for fear of rejection; Country-level information on Unsuccessful SMEs is provided in Annex 6 to Chapter 1. 2. Using the estimated Unsuccessful SMEs, the SME loan financing gap (LFG) is calculated as follows: LFG = Nr SMEs × Financially Viable SMEs × Unsuccessful SMEs × Average SME loan size Where: I. Nr SMEs: number of SMEs; II. Financially Viable SMEs: share of SMEs exhibiting positive turnover growth;3 III. Unsuccessful SMEs: share of financially viable SMEs unsuccessful in obtaining loan financing (see above); IV. Average SME loan size: average size of loans granted to SMEs. Country-level information on the SME loan financing gap is provided in Annex 6 to Chapter 1, under the indication for the "Estimated interval for SME Loan Financing Gap" with a lower and an upper bound. Overall, the upper bound at the EU28 level is estimated at EUR 105bn. These are the reference figures for the SME loan financing gap used in Table 1, columns 2- 4 below. At the Member State level, significant differences in SME access to finance 2 This box briefly introduces the methodology adopted in the estimation of the loan financing gap. The reader is referred to Section 4.1.2 and Annexes 3 to 7 to Chapter 1 for a comprehensive description of the study performed and the data sources involved. 3 For a detailed description of the measurement of financially viable SMEs, the reader is referred to Section 4.1.2 and Annex 4 to Chapter 1. 9 emerge: while some Member States seem to experience almost no problem in financing their financially viable SMEs, other countries appear to record a substantial SME financing gap. An assessment of the projected evolution of the main factors affecting the SME financing gap in the upcoming years (the EU economic outlook, the evolution of the financial conditions of banks, the developments of credit guarantee schemes, the developments of the SME securitisation market, the introduction of measures against late payments, the development of alternatives for bank finance, the launch of the banking union) points to a likely reduction of the financing gap, although to an extent that is not bound to greatly affect our current quantitative assessment.4 Having established the existence of a financing gap at all levels – albeit with differences across geographical areas – Chapter 2 examines the rationale for policy interventions, in particular through the SME Initiative. The need for policy intervention is established, both to enhance SMEs' credit availability (through the revival of the SME securitisation market and the SME uncapped guarantee market), and in the field of entrepreneurship and innovation to counter information asymmetries, transaction costs and lack of sufficient policy coordination and to foster spill-over effects. Secondly, the case is made for public intervention at the EU level, rather than at other levels, due to the EU-wide lack of access to finance. Furthermore, an EU-level intervention may also trigger off positive externalities throughout the area; i.e. i) the scale of the EU-wide policy measure may enhance its efficiency (critical mass), ii) an EU-wide initiative can contribute to repairing the monetary policy transmission channels, iii) the EU banking system as a whole can benefit from the "bank multiplier" effect of additional SME loans. Successively, the SME Initiative is described: the two proposed products (uncapped portfolio guarantee and portfolio securitisation) are analysed in detail, including the necessary critical mass for the 3 options (EUR 3 bn for Option 1, generating an aggregate SME loan amount of up to EUR 15 bn; 4-5 bn for Option 2, generating an aggregate SME loan amount of EUR 28-35 bn; and 4-5 bn for Option 3, generating an aggregate SME loan amount of EUR 36-45 bn). The proposed SME initiative does not require new legal bases, but uses the legal framework that already exists, namely the COSME and Horizon 2020 legal acts, together with the Financial Regulation and the Common Provisions Regulation (CPR). Thus, the implementation of both the uncapped guarantee and the securitisation instruments will follow clearly defined rules and principles on addressing market failures, non-distortion of competition, additionality, selection of financial intermediaries, as well as on reporting, monitoring, intervention modalities. This framework is set to ensure, inter alia, avoidance of moral hazard through alignment of the financial intermediaries' interest with EU objectives, and pursuit of best practices through the financial expertise of the EIB Group as the implementing body. Alignment of interest with the intermediaries will be ensured through risk sharing (in the case of uncapped guarantees) and retention of portfolio First Loss Piece by the originator (in the case of securitisation). Finally, the value added of the Initiative is assessed in the light of the rationale for EU intervention established beforehand. The Ex-ante assessment concludes that the value added of the SME Initiative is its potential to: 4 Our assessment of the gap is very conservative and actually likely to be underestimated, due to the exclusion from our estimate of "financially viable" SME loan requests which have been partially turned down. 10