As regards the solvency support measures for firms, according to Banco de España estimates, the funding approved could cover all the capital shortfalls of firms generated in 2020 as a result of the crisis. Nevertheless, the use of such funding so far is estimated to have contributed to reducing only a part of the SME solvency problems that arose as a result of the pandemic.16 This could owe to the fund allocation criteria not including any requirement relating to firms’ financial position, among other reasons. On the whole, the evidence available suggests that the public policy response has helped reduce the long-term consequences of the pandemic-induced crisis. Specifically, the measures implemented have managed to preserve most of the pre-pandemic employment and avoided an increase in the rate of firm closure. In particular, our latest Financial Stability Report highlights that, in the case of non-financial corporations, although the recovery in sales and the more moderate debt growth in 2021 have prompted an improvement in businesses’ financial situation, on average this continues to be more vulnerable than before the pandemic. For example, the average debt and debt burden ratios began to fall in 2021, and the percentage of firms with high debt decreased across the board, standing close to pre-pandemic levels in the moderately affected and largely unaffected sectors. In the severely affected sectors, however, it remained 7 pp higher than in 2019.
One is an apparent reluctance on the part of banks to raise fresh capital except where the market thinks that it is beyond doubt that they need to do so. Given the feedback from credit conditions to asset prices and the real economy and so potentially to banks’ future earnings, it might seem slightly odd for banks internationally to be maintaining distributions to shareholders but tightening credit availability in order to preserve resources. This has to be seen in the wider context. One possible explanation for banks holding back from raising fresh capital is that they may want to avoid giving an adverse signal about themselves. If there is a co-ordination problem, the regulatory authorities internationally should be able to tackle it, allied to ensuring prudent valuations of legacy portfolios. But another possible explanation is that, like some other market participants, bankers may believe that many legacy assets are fundamentally undervalued at present and that the markets for securitised assets will, with time, recover and reopen. On that view, banks are avoiding becoming overcapitalised on a fundamentals (or forward looking) basis, and so setting off another expansionary phase in the credit cycle, a little further down the road. The serious puzzle which that underlines is why there is a dearth of buyers for the supposedly undervalued paper. With the terms and availability of financing from banks and dealers having tightened, levered funds are hardly likely to be the US Cavalry.