The first few months of 2013 saw the phenomenon of the credit crunch worsen: the number of companies that complain of being rationed, especially among the smaller ones, is constantly increasing. This phenomenon, as emerged during the conference "A finance for growth" promoted by the Circolo REF Ricerche in collaboration with Comoi at the Circolo della Stampa in Milan, it presents very high economic and social costs, and contributes to worsening and prolonging the recession underway in Italy, as well as in other European countries. The data speak for themselves: the variation rates of bank loans to businesses have been largely negative for more than a year now, for all size categories. However, the data reported in the Financial Stability Report of the Bank of Italy (2013) indicate that small and medium-sized enterprises are those that report with greater intensity that they are rationed. Furthermore, the gap between the interest rates paid on the different size classes of loans has also been increasing since the beginning of 2012. Here is the professor's speech Angelo Baglioni, REF Ricerche, during the conference in collaboration with the Comoi Group.
The credit crunch is not only a phenomenon related to the restrictive conditions of the supply of loans, but also reflects the decline in business investment and consequently the decline in loan demand. However, the surveys carried out by the European Central Bank with reference to the euro area and by the Bank of Italy for our country indicate a tightening of credit supply conditions, the pro-cyclical effect of which is undeniable.
2012 is characterized as the first year in which the decline in bank loans affected not only companies classified as "risky" (based on budget indicators), but even those considered “healthy” or “vulnerable”, contrary to what happened in the previous two years. This indicates a credit restriction which also penalizes companies with good income and capital conditions; the fact that these firms have to reduce their activity due to financial constraints is a particularly inefficient outcome of the current situation.
The main determinant of the credit crunch lies in the increase in credit risk associated with banking activity. As can be seen from the data on the default rate of bank loans, in 2012 this indicator underwent a surge, with reference to businesses, which in turn added to the strong increase that had already occurred during the 2008-2009 crisis . The household indicator is more stable, but it is still higher in the last three years than in the previous decade. The tightening of credit granting conditions is the banks' reaction to the increased riskiness of their business.
Looking ahead, it is difficult to think that our country can quickly emerge from this situation of shortage of bank credit. This is not only for the economic reasons just mentioned, but also for other reasons. Among them, it must be remembered that the Italian banking system has long been characterized by a high funding gap: an excess of loans to customers compared to funding from the customers themselves (households and businesses). This structural datum forces Italian banks to turn to international wholesale markets, which constitute a decisive source of financing. However, this source has gradually dried up during the financial crisis. In particular, the worsening of the sovereign debt crisis has produced a segmentation of the monetary and financial markets in the euro area, which makes it difficult and expensive for Italian banks to access these markets. Another structural factor, which will act against a recovery in bank credit volumes, is given by the ongoing transition towards more stringent forms of regulation: not only the tightening of capital requirements linked to the Basel III agreement, but also the entry into force of the new liquidity requirements.
Italian companies are traditionally dependent on bank financing, to a much greater extent than in other countries, not only the Anglo-Saxon ones but also those of continental Europe. According to Bank of Italy data, in 2012 the share of bank debts on the total debts of non-financial companies was more than 65% for Italy, while it was less than 40% for France and 50% for Germany ; the figure for the USA and UK is around 30%. This excessive dependence is primarily due to the Italian industrial structure, which is particularly biased towards small-sized enterprises. It particularly penalizes the Italian industrial system, compared to foreign competitors, in a phase in which the offer of bank credit is weak for the reasons just illustrated.
For these reasons, it is urgent to identify alternative financing channels for companies to the traditional banking intermediation activity. This urgency has been underlined by many in the current policy debate.
New channels of business financing
The identification of alternative financing channels to the banking one must start from the observation that institutional investors intercept a considerable amount of household savings, which can in part be channeled towards the production system. An international comparison shows that there is room for an increase in the collection of these intermediaries. Furthermore, the composition of their investments should evolve towards greater diversification, given the current strong concentration towards investment in government bonds.
On the collection side, the incidence of assets managed by insurance companies and above all by pension funds, in relation to household savings, is significantly lower in Italy compared to other countries in the euro area, as well as to the USA and the UK. On the assets side, the data relating to 2012 indicate that 66% of the technical reverses of Italian insurance companies are invested in government bonds. For pension funds, the portion invested in government bonds is equal to 50%. It is therefore evident that a development of supplementary pensions and a greater diversification of assets in the insurance sector represent opportunities to be exploited, in order to channel a greater share of household savings towards businesses.
In this perspective, an important role can be played by non-bank intermediaries: these could become the channel for the transmission of savings from institutional investors to businesses. In fact, by their nature, institutional investors do not carry out an activity of selecting the companies to which to disburse loans, especially in relation to SMEs. They typically invest in publicly traded securities based on publicly available information. Their investments on the financial market are mainly directed to government bonds and corporate bonds issued by larger companies. Conversely, there are non-bank intermediaries that specialize in company valuation: for example, private equity and venture capital funds. This sector has suffered a contraction in recent years, following the financial crisis; it is currently much less developed in Italy than in other European countries. There is therefore the potential for the development of these intermediaries, which could raise growing volumes of resources from institutional investors to finance even small businesses and investment projects in the start-up phase. Furthermore, the development of this sector could be a partial remedy for the historical aversion of SMEs to listing on the stock exchange: by providing risk capital, private equity funds play a complementary role to that of the stock exchange. This role is particularly relevant in Italy, where the stock exchange has a smaller size – in relation to GDP – than in other European countries.
A particular type of intermediation, which could take off quickly, is operated by the Specialized Investment Funds (SIF). These are investment funds, aimed at institutional investors, which finance export credit. An exporting company, which grants a deferred payment to a foreign importer, typically needs to transfer the trade credit it holds due to liquidity needs. Given the scarcity and cost of bank credit, it can turn to a SIF, which purchases commercial credit without recourse, represented by a letter of credit issued by the bank assisting the importer. In this way, the Italian exporter receives liquidity and gets rid of the credit risk. The SIF purchases an asset with limited risk, given the guarantee of the bank that issued the letter of credit. Furthermore, it may apply diversification and risk control techniques, and thus offer institutional investors the possibility of investing in a fund that meets their risk limitation requirements.
Credit funds have developed in the Anglo-Saxon markets. Also in this case, these are operators who operate according to the logic of the mutual investment fund. However, rather than simply buying market-traded securities, they lend to businesses, often over long horizons and holding them to maturity. These can be both newly issued loans and loans already originated by another financial intermediary, who transfers them to a credit fund. In this second case, we are obviously in the presence of a securitization transaction.
Securitization is receiving a lot of attention in the current debate: many are hoping for a recovery in the market for asset backed securities (ABS) with corporate loans as the underlying rather than real estate mortgages. However, this technique must be viewed with due caution. First of all, it must be remembered that it poses a problem of distortion of incentives in the credit intermediation sector: the practice of granting a loan and then selling it on the market reduces the incentive of a bank to correctly assess and monitor the debtor's creditworthiness. Furthermore, securitization has often given rise to complex financial products that are difficult to evaluate; the fact that these products are traded outside organized markets adds opacity to the process of their price formation. These characteristics make ABS vulnerable to sudden liquidity crises, where trading is drastically reduced in a short period of time; this is what happened with the explosion of the financial crisis in 2007-2008.
To avoid repeating the mistakes of the recent past, the Financial Stability Board and IOSCO have recognized the need to proceed with a harmonization of the rules at international level, according to certain principles. First, risk retention: the intermediary who sells the loans underlying an ABS issue must keep a portion (at least 5%) of the loans in their balance sheet. Second, transparency: ABS issuers must provide investors with sufficient information to assess their risk; professional investors must be able to carry out stress tests on these financial products on their own, receiving information similar to that provided to rating agencies.
