SMEs in the capital markets — everyone wants it, but who pays for it?
Funding for small and medium enterprises is everyone’s favourite thing. But unless it makes money, nobody will do it.
Every politician, regulator, and do-gooder banker seems to like funding small and medium enterprises. It’s become the capital markets equivalent of motherhood and apple pie — good news banking for an industry desperate to restore its reputation.
There is a need for it, of course. Small and medium enterprises have struggled to find bank funding (though loans to the hallowed group have had a special cut in capital requirements since CRD IV was passed) and are probably under-served by European financial markets. The mighty Eurobond market offers cost-effective, flexible funding for corporates across the continent but only once they reach a certain size.
Now, with the European Commission pushing forward Capital Markets Union, expect another push to get SMEs into the market. Whether it be through special listing regimes, credit registers or boosts for securitization, it is clearly part of the agenda for European markets.
But intermediaries are moving in exactly the opposite direction.
Nearly all of Europe’s investment banks, the institutions set up to take issuers to the capital markets, are trimming their client lists in banking. While the political mood music is all about serving Europe’s smaller companies, bank executives talk about more cross-selling to a smaller list of top tier clients.
Strategic rationalisations, cost-cutting and whole-relationship analysis are all different words to describe the same process — get rid of clients that don’t pay their way. Relationship loans and coverage for the sake of coverage are going the way of the three-martini lunch and suspenders.
Some banks are softening the blow by promising tighter integration with their corporate banks but fewer coverage bankers and tighter targets still point in the same direction.
Inevitably, that will mean smaller clients lose out. Medium enterprises that are just about big enough for the capital markets, but not big enough to be regular visitors, just won't be able to pay the fees to justify covering them — never mind educating them about the burgeoning future of the French private placement market or the advantages of the Milan listing regime.
At the small end of “small and medium enterprises”, the problem is more likely to be compliance. Banks made these relationships pay in the past by selling ancillary services, especially derivatives, but this has blown up into a seething mass of misselling claims.
Ramming complex swaps into reluctant small businesses was never a good idea, but it means that banks are now more careful than ever about the interface between small business and the markets. More care means more compliance and more time, and that all costs money.
Capital Markets Union, and its related initiatives, can undoubtedly help a bit — simpler documents and smoother legal processes cut costs and speed up execution of deals.
“Banks charge special higher fees to SMEs” is a headline nobody wants to see, but fundamentally, if banks aren’t taking their smaller clients to market, it’s because there isn’t any money in it.