Lorenzo Bini Smaghi: Monetary policy, credit flows and small and medium-sized enterprises Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, San Casciano Val di Pesa, 18 October 2009. *  *  *  I would like first of all to thank the organisers of this event for their invitation, which allows me to speak about monetary policy, credit developments and the situation of small and mediumsized enterprises (SMEs) in the euro area. I will structure my comments as follows: after briefly outlining the importance of SMEs in the euro area, I will examine the situation in the banking sector and discuss some aspects of the process of bank restructuring in the euro area. I will look at bank lending developments in the euro area, before analysing some of the evidence on SMEs’ access to finance which emerged from a recent survey conducted by the ECB. I will conclude with some observations concerning the economic outlook and the role that monetary policy can play in this context. In brief the main conclusions are as follows: first of all, the situation in the euro area banking sector improved in the first half of 2009. Nevertheless, a number of considerable risks remain, some of which might even have increased. Second, the volume of bank loans to the non-financial private sector has been modest in recent months.
In addition, trading income recovered strongly as financial markets rebounded after the first quarter of 2009. Finally, revenues from fees and commissions held up remarkably well throughout the financial turmoil. At the same time, a number of significant risks remain and some may have even increased. First, the slowdown in the growth of assets held by euro area banks limits their future earning capacity in terms of interest and investment income. Second, a deterioration in the credit quality of borrowers may put a drag on banks’ future earning capacity. In fact, while large and complex banking groups seem to be gradually absorbing the losses they suffered on their securities holdings, driven in part by the reclassification of assets, they have reported sharply higher provisions for loan losses. Let me now turn to capital ratios. The recovery in the earnings of large and complex banking groups in the euro area, together with a slowdown in the growth rate of both risk-weighted and total assets and an increase in capital, from both public and private sources, has meant that the capital ratio of the average banking institution has typically been relatively stable. There is, however, considerable divergence between groups. A somewhat reassuring finding is that the institutions which reported the largest increases in loan loss provisions also seem to have the highest capital buffers. This may mitigate the solvency risks originating from deteriorating asset quality in the future.