EIB Volume 8 No 2 2003 PAPERS Europe’s changing financial landscape: The financing of small and medium-sized enterprises Editors’ comment 9 SME finance in Europe: introduction and overview 10 Rien Wagenvoort Are finance contraints hindering the growth of SMEs in Europe? 22 Rien Wagenvoort Financing the German Mittelstand 52 Ulrich Hommel & Hilmar Schneider Financing small businesses in France 92 Michel Dietsch Small business finance in Italy 120 Luigi Guiso Editorial Policy Editor The EIB Papers are published each year by the Economic and Financial Studies Division of the European Investment Bank. The Armin Riess publication, comprising two editions, aims at encouraging high-quality economic research and debate on matters of European interest. As such the Papers are intended to be accessible to non-specialist readers and emphasise policy dimensions rather than technical issues. They present the results of research carried out by Bank staff together with contributions from external scholars Assistant Editor and specialists. Rien Wagenvoort Articles will only be accepted for publication on the condition that they have not already been published elsewhere. All articles in the EIB Papers may be freely reproduced and quoted; however, the Editor would appreciate acknowledgement and a copy of Production the publication in question. They can also be accessed and downloaded free of charge from our website: http://www.eib.org/efs/ Farrah Baut-Carlier EIB Graphic Shop The views expressed in the articles are those of the individual authors and do not necessarily reflect the position of the EIB. Contents Preface by Ewald Nowotny, Vice-President 5 Conference speakers 7 Europe’s changing financial landscape: The financing of small and medium-sized enterprises Editors’ comment 9 SME finance in Europe: introduction and overview 10 Rien Wagenvoort Are finance contraints hindering the growth of SMEs in Europe? 22 Rien Wagenvoort Financing the German Mittelstand 52 Ulrich Hommel & Hilmar Schneider Financing small businesses in France 92 Michel Dietsch Small business finance in Italy 120 Luigi Guiso EIB PAPERS Volume 8 N° 2 2003 3 Preface Europe’s financial landscape is changing fundamentally. Key signs of this change include banking sector consolidation, mergers between different types of financial institutions - such as banks and insurance companies - that used to concentrate on particular financial services, a declining importance of bank intermediation relative to funds channelled through capital markets, and regulatory reforms. These changes are likely to affect small and medium-sized enterprises Ewald Nowotny (SMEs), and concerns have been raised that they could lead to a Vice-President shortage of finance. As these enterprises are the backbone of the EU economy, accounting for the bulk of employment and contributing significantly to the diversity and resilience of our economies, economic policy cannot turn a blind eye to possible problems in SME finance. Against this background, the purpose of this edition of the EIB Papers is to explore the nature of SME finance in the EU (another edition of the EIB Papers - namely Volume 8, Number 1 - reviews the main features of Europe’s changing financial landscape). The questions addressed in this edition are diverse and include: how do SMEs finance their activities, investment in particular? Are small firms at the mercy of (too) few suppliers of finance and, related to this, do small firms usually rely only on one bank? Can we detect significant differences in the financial structure of small and large firms? If so, do these differences reflect firms’ choice or constraints they face in financial markets? Irrespective of the answer to the last question, do possible differences in financial structure matter for the growth of firms? If so - and if it is not due to firms’ choice - what can be done about it? Specifically, what is the proper role of economic policy in all this, and to what extent can firms themselves improve their access to finance? To conclude a long but far from exhaustive list: is the picture on SME finance roughly the same for all EU countries and, if not, what are the main country specifics? As a policy-driven institution with a mandate to support SMEs by extending loans and by providing equity capital and guarantees via its venture capital arm, the European Investment Fund, the European Investment Bank obviously has a keen interest in understanding the challenges of SME finance. I am convinced that with the research put together in this edition we have made great strides in this respect, and I am pleased that we can share our insights with the readers of the EIB Papers. EIB PAPERS Volume 8 N° 2 2003 5 Europe’s changing financial landscape: The financing of small and medium-sized enterprises The 2003 EIB Conference on Economics and Finance, which was held at the EIB on 23 January 2003, aimed at reviewing Europe’s changing financial landscape and the policy challenges arising from this. The conference concentrated on two main issues. Firstly, developments in the European capital market, the increasing importance of active institutional asset managers and the restructuring of the EU banking sector. The second issue related to the capital structure and finance of European SMEs, which is bound to be affected by the ongoing changes in the structure and regulation of banking. Speakers included: Patrick Artus, Michel Dietsch, of CDC IXIS, Paris of the University of Strasbourg Thorsten Beck, Luigi Guiso, of the World Bank, Washington of the University of Sassari Graham Bishop, Ulrich Hommel, of GrahamBishop.com, Battle of the European Business School, Oestrich-Winkel Arnoud Boot, of the University of Amsterdam Philippe Maystadt, President of the EIB E. Philip Davis, of Brunel University, Rien Wagenvoort, West London of the EIB EIB PAPERS Volume 8 N° 2 2003 7 Editors’ comment Europe’s financial landscape is undergoing fundamental changes, which are driven by market forces, demographic trends, and - last but not least - economic policies, notably the creation of the European Monetary Union and the move towards the Single Market for financial services. These changes are having a considerable impact on EU economies. It is against this background that both editions of this year’s EIB Papers are devoted to Europe’s changing financial landscape. This edition concentrates on the impact of these changes on the financing of small and medium-sized enterprises. The other edition (Volume 8, Number 1) looks more broadly on recent developments and prospects for finance in Europe. That edition also features an overview paper, which leads into the theme and summarises the papers in both editions. The papers contained in Volume 8, Number 1 are: The transformation of finance in Europe: intoduction and overview Eric Perée & Armin Riess (European Investment Bank) Stock markets, banks, and economic development: theory and evidence Thorsten Beck (World Bank) The role and development of EU capital markets Graham Bishop (GrahamBishop.com) Institutional investors, financial market efficiency, and financial stability E. Philip Davis (Brunel University) Restructuring in the banking industry with implications for Europe Arnoud Boot (University of Amsterdam) Armin Riess and Rien Wagenvoort EIB PAPERS Volume 8 N° 2 2003 9 ABSTRACT Introducing the topic of SME finance and summarising the main findings of the contributions to this edition of the EIB Papers, this overview stresses the importance of relationship banking for the supply of SME credit; points out the differences and similarities in the capital structure of firms across size classes and across Europe; observes that while there is little evidence of widespread SME credit rationing, financial market imperfections may nevertheless curb SME growth; and highlights that the changes in Europe’s financial landscape - including bank consolidation and Basel II - promise to foster SME finance. Rien Wagenvoort is an Economist in the Economic and Financial Studies Division of the EIB. The views expressed in this paper are strictly personal. 10 Volume 8 N° 2 2003 EIB PAPERS SME finance in Europe: introduction and overview Noise proves nothing. Often a hen who merely laid an egg cackles as if she had laid an asteroid. Mark Twain 1. Introduction Europe’s financial landscape is experiencing sweeping changes, driven by a variety of factors, notably the introduction of the euro, deregulation and liberalisation aimed at creating the Single Market for financial services, progress in information and communication technology, increasing wealth, and population ageing. These changes - in particular the restructuring, consolidation, and reorientation of banking - are likely to affect the financing of small and medium-sized enterprises (SMEs). But are these changes Rien Wagenvoort a blow or a blessing for SME finance? Some of the changes in Europe’s financial landscape should work in favour of SME finance. Firstly, new information and communication technologies contribute, at a lower cost, to reducing information asymmetries between lenders and borrowers, thereby making SME lending more attractive (see, among others, Frame et al. 2001). Secondly, partly due to progress in information technology, new banking methods are being developed and implemented. For instance, banks adopt new portfolio credit risk models that allow them to allocate and price their resources more effectively. Moreover, the use of credit risk transfer mechanisms (such as the securitarisation of SME loans) is spreading,