Fostering SMEs

By SME Europe

On 28th September 2016, SME EUROPE of the EPP hosted a Working Breakfast in the European Parliament concerning the following thematic, “Fostering SMEs – can covered bonds finance SMEs?”. We were happy to welcome the key participants of the event including: Bendt Bendtsen MEP, Markus Ferber MEP, Ane Arnth Jensen (Managing Director from RKR-Association of Danish Mortgage Banks), Martin Merlin (Financial markets in the Directorate General for Financial Stability, Financial Services and Capital Markets Union of the European Commission), Christian Stiefmüller (Senior Policy Analyst at Finance Watch), Peter Gaemelke (Danish Pig Farmer), and Jens Valdemar Krenchel (Director, RKR/ADMB).

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Mr. Bendtsen kicked off the event with the welcome remarks and stated that he was very happy to be introducing this event as the President of SME EUROPE. He gave a short overview of what he believed to be necessary on the agenda for covered bonds including a harmonization process and more transparency in development of a suitable framework which should not impede but be based on an effective and affordable covered bond system.

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Ms. Jensen was first to speak on the discussion panel and highlighted the many challenges facing SMEs when it comes to funding. He also made it very clear that 90 million people are employed by SMEs throughout Europe which equals an amount of 67% of total employment in the EU.

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Mr. Ferber was next to take the floor and started by mentioning that most SMEs are funded by loans, whilst some are not so lucky when it comes to securing this finance. He is a strong believer in diversity and feels that there should be more than one source of finance open to SMEs. Mr. Ferber is convinced that Europe is seriously under developed when it comes to financial development and that we should be exploring different and innovative ways of funding SMEs. He then recalled the long history of covered bonds in Germany and how, so far it has been a successful model. He then beckoned the question of whether this is purely a national solution, or one which can be employed at EU level. Mr. Ferber assured the participants that in his opinion the free movement of capital has been achieved, but that now the problem is how to freely access this capital.

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Next to speak was Mr. Valdemar Krenchel who thought that it was important to be able to distinguish between the different types of bonds on offer. He called for the drafting of a capital unions market plan in the form of a Commission white paper. Mr. Valdemar Krenchel believes that the strength of covered bonds is that they provide cheap funding, good access and stability from which SMEs could considerably benefit. Before a loan is given, he believes that an asset assessment should be conducted. The mortgage banks are said to support many industries including the educational sector. He also claimed that mortgage lending remained resilient during the financial crisis and compensated for the slump of overall bank lending.

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Mr. Gaemelke informed the participants that as a farmer, the generation shift of this trade to his son remains a challenge. He believes that SMEs can help change this as they develop society whilst creating growth and jobs. He agreed with Mr. Ferber that terms of lending should be transparent and that the German model of the covered bonds system should serve as an inspiration for future models.

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Mr. Merlin continued the discussion by asking the question of what else can covered bonds do for the EU besides allowing access to funding. He highlights the continuous support and calls form member states to have a minimal harmonization of covered bonds on EU level. Mr. Merlin sees the possibility of a collective covered bond directive on EU level with very high standards.

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The penultimate observations were made by Mr. Stiefmüller who announced that Finance Watch has man SME associations as members, and that he is very happy to see the focus returned to the SMEs. Mr. Stiefmüller was very adamant that covered bonds do not encourage excessive leverage but that they are very cost effective and do not require explicit subsidies leaving little room for intermediaries. He said that they should not be seen as a risk transfer tool, but rather as a means of stable, long term funding for people with a long term ability. He noted that there are structural benefits available through a diversity of banking business models, and that this is made possible by the specialization of banks and designated experts in different investment areas. He highlighted the weakness of the current system is that SMEs need an existing property mortgage in order to be eligible for covered bonds, this could be difficult for start-ups for example. He therefore believes in the production of an effective framework. His main criticism is the lack of equity depth facing SMEs which is a real problem as equity markets are of crucial importance for small businesses.
Mr. Bendtsen made the closing remarks and thanked the participants and SME EUROPE for organizing the event. The time afterwards was put to good use by the other participants who used this opportunity for effective information exchange regarding the future of covered bonds as a viable financial support option for European SMEs.

The publication of this document received financial support from the European Parliament. Sole liability rests with the author. The European Parliament is not responsible for any use that may be made of the information contained therein.