Between 2002 and 2010, 85% of total employment growth in the EU was attributable to SMEs, and SMEs have a much higher employment growth rate (1% annually) than large enterprises (0.5% a year). And within the SME class, most employment growth takes place within young firms9, for whom external financing is particularly important as they cannot draw much on internal funds. Recent research from the US has shown that these firms also tend to be more sensitive to changes in investment opportunities.10 So what is the solution here? There are many schemes underway in Europe to address this problem that I will not try and cover today. But one unifying theme that I see as critical is to better match the needs of SMEs with the funds of non-bank investors, thus providing more diversification for SMEs. One way in which non-banks provide this diversification is in terms of counter-cyclical access to credit. When banks contract credit, less risk-averse investors such as private debt funds or peer-to-peer lenders can fill the gap and thus help smooth the credit cycle. Another way is in terms of maturities. While regulatory changes have made commercial banks less willing to make long-term loans, some large institutional investors – for example pension funds and insurance companies – need assets with maturities and returns that match their liability profiles. SME lending can provide this, especially while long-term safe assets exhibit low rates of return.
On the other hand, if what we are seeing is the beginning of a structural shift from bank to non-bank financial intermediation, we have to keep a close eye on the potential risks that might be building up. Indeed, there may be little long-term value in shifting risk from a highly regulated sector to a lightly regulated one, particularly if more and more lending is taken up entities that fall outside the regulatory reach. Conclusion Let me conclude. My message today is simple: the euro area financial system has been hit by a major shock, which few of us foresaw, but through good policy choices it is possible to steer this development towards a positive outcome, while avoiding unintended negative consequences. And looking at the developments across the euro area today, in my view the right choices are being made. Banks are already strengthening their capital as a result of the comprehensive assessment. The European supervisor will be fully operational in November this year. From next year we will start building up a single fund for European bank resolution. And initiatives are underway to strengthen access to finance for SMEs, especially through securitisation. For Asia, there is every reason to be confident that the euro area is addressing the structural problems in its financial system, which should in turn support more sustainable growth in Europe and for the world economy.