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The European Central Bank's magic wand for solving the euro zone's SME crisis lacks pizzazz. Executive board member Benoît Coeuré outlined on April 11 some concrete proposals to address the credit drought hitting small and medium-sized enterprises (SMEs) in Europe. They're good. They may not be enough.
As Mr. Coeuré's speech acknowledged, SME credit is a big problem. SMEs represent 98 per cent of the euro area's firms and employ three-quarters of its workers. In the six months to January, he says small firms were on average paying 160 basis points more than larger peers for finance. The spread is wider, and the pain higher, in countries already groaning under austerity, like Spain.
The ECB's main countermeasure so far – three-year loans at low rates, secured on increasingly ropey collateral – isn't working. Banks have either kept the money in deposit or are using it to buy high-yielding sovereign debt. Lending to flaky small businesses is even riskier, and while the collateral is eligible for liquidity at the ECB, it is subject to huge haircuts.
Mr. Coeuré suggests two ideas. He's lending support to a European plan to reduce the 100-per-cent risk weight on SME loans to 75 per cent. This would help, but only up to a point. Even if you remove the regulatory capital requirement, banks may still be wary. In the U.K., for example, the "funding for lending" scheme treats new SME lending as capital-free, but is having little effect.
Mr. Coeuré's other proposal looks better. He is giving the ECB's blessing to an initiative by private financiers to standardize SME loans so that they can be more easily packaged into securitized debt. He has also called on the European insurance regulator to make sure that insurers subject to new "Solvency II" capital reforms are not discouraged from buying securitized SME debt.
The two measures could create a liquid, U.S-style capital market for SME debt, reinforced with lashings of cheap ECB funds, Mr. Coeuré implies. But it will take time. And even a burgeoning market in securitized SME loans would not guarantee a thaw in the credit freeze.
It would be different if the ECB itself bought tranches and removed some of the credit risk from the banks. But that is anathema to an institution that is against monetary financing. Other radical ideas, such as the ECB providing cheap leverage to non-bank lenders, may be considered too racy. The ECB needs to find other magic tricks.