Sharon Donnery: Business finance & investment - recovering from
the pandemic, preparing for future challenges
Closing remarks by Ms Sharon Donnery, Deputy Governor of the Central Bank of Ireland, at the
joint Central Bank of Ireland, European Investment Bank, ESRI conference, "Business finance &
investment - recovering from the pandemic, preparing for future challenges", virtual, 21 March
2022.
* * *
Ladies and gentlemen, it is a pleasure to speak to you to close our conference today. My sincere
thanks to the organising committee for their work in preparing and managing the event.
We have learned a great deal from the Minister's address, from the four presentations, and from
the panel discussion today. I thank all the participants for sharing their expertise on this critical
topic.
Investment, both public and private, is the engine of long-term economic growth. Financing
conditions that facilitate sustainable levels of private investment are a prerequisite to a
successful economy. The need for a financial sector that can provide financial services to
businesses through both good times and bad is a core tenet of our entire regulatory approach,
and particularly our macroprudential policy strategy.
Here at the Central Bank our understanding of the financing and investment situation of the Irish
business sector has evolved over the decade since the previous financial crisis. In the early
phases of acute crisis and recovery, up to 2013, a sharp debate took place in Ireland around the
role that credit supply and demand played in the provision of credit to the private sector, and to
SMEs in particular. Our own conclusions at the time were drawn from a wide research agenda.
That research showed that while demand was certainly subdued due to over-indebtedness and
sentiment factors, the supply side of the credit market was also leaving significant gaps that
could contribute to under-investment by the SME sector. This highlighted the importance of a
resilient banking sector. It also showed how a lack of resilience can have long-lasting
implications for the economy - something that motivates our approach to policy today.
By contrast, the period of economic recovery from 2013 to the start of the pandemic, was one in
which credit supply concerns diminished. Our analysis was that while certain small pockets of
under-provision of credit could be identified, the primary reason for weak private credit growth to
Irish businesses lay in a weak appetite for borrowing. These conclusions were motivated by a
range of survey evidence which has consistently shown that application rates by Irish SMEs for
bank finance were among the lowest in the euro area. Irish SMEs were among the most likely in
Europe to report they had sufficient internal funds for investment purposes. In addition, the share
of SMEs reporting that access to finance was an obstacle to their doing business declined
towards European norms. The period was one in which memories of the personal experiences
of many indebted business owners were fresh on many people's minds. This may also be a
continued feature of the demand-side of the business lending landscape in Ireland. The easing of
supply conditions during that period was no doubt supported by the ECB's accommodative
monetary policy stance, both directly through improved funding conditions for banks and
indirectly by supporting economic activity and sentiment. A further factor came through the repair
of banks' balance sheets from reductions in non-performing loans and improvements in capital
ratios.
A number of other Government interventions have had a significant influence on SME credit
policy since the financial crisis. For example, the creation of the Credit Review Office, the
establishment of MicroFinance Ireland, the Strategic Banking Corporation of Ireland with its
various targeted lending schemes and the introduction of loan guarantee schemes. These policy
actions have all played a targeted role in improving financing conditions for businesses. They
have also played an important signaling role, much as the existence of longer-established bodies
like Enterprise Ireland does, that the Government in Ireland is serious about this issue, and is
willing to deploy legislative powers and financial resources to address perceived or actual market
failures.
So where do we find ourselves today, as the economy emerges from the worst of the pandemic
but faces an ever-expanding range of future sources of risk? The great benefit of events like this
is in offering a comprehensive overview of current credit and investment trends.
The work of the Department of Finance, covering ten years of experience with the Credit
Demand Survey, provides very useful context. The detailed micro-data this survey provides are
invaluable in our assessment of SME credit market developments and have been the foundation
of many research papers by economists in the Central Bank, ESRI, and elsewhere. A key insight
provided by these data is the untangling of credit demand and supply factors in the market.
Our own work in the Central Bank can be described as having two broad themes. Firstly, as
addressed by the Governor this morning, we are keenly engaged in the domestic policy debate
around the fallout from the pandemic. For a sizable cohort of businesses, the pandemic has
been a period of sustained loss-making and a build-up of liabilities to a range of creditors
including the Revenue Commissioners, landlords, suppliers, and to banks. Our focus in this area
is on both the conduct and strategy of banks and other lenders we supervise, as well as on
informing the public debate with evidence-based research.
Secondly, we remain focused, as always, on questions of the supply of and demand for new
loans. As a member of the Eurosystem, the way in which lenders transmit monetary policy to the
real economy is an ever-present topic of focus for us. Similarly, an understanding of banks'
capacity and willingness to lend is critical to our implementation of macroprudential policy.
The work presented by Niall today shows the underlying trends of the last decade have not been
interrupted by the pandemic. Essentially this work shows a reasonable supply of credit from the
local financial system in combination with comparatively weak demand for new loans. One big
question for the coming months and years is whether credit demand has been artificially
suppressed for two years by the unprecedented provision of direct grant and wage subsidy
support of the Government. If this proves to be the case, one may expect a pick-up in demand for
bank loans upon the removal of those supports. We will be closely monitoring these issues.
Moving now to the topic of investment, both the ESRI and EIB papers provide a wealth of insight.
We have learned today that, as you might expect during a period of such unprecedented
uncertainty, both the share of businesses investing and, in particular, the monetary value of
investments fell substantially in 2020.
The ESRI study also highlights that a pocket of SMEs are not happy with their current capacity
levels. This group agree or strongly agree that access to finance is a barrier to expansion. These
findings tell us that, regardless of our views on the aggregate trends, there remains a perception
among a sizable group of SMEs that the provision of external financing could be improved in
Ireland. In addition, it shows that inadequate provision of financing may be holding back
1
investment to some extent. One must always caution in such surveys that the demands of
entrepreneurs may deviate very reasonably from the views that a lender or, indeed, a
policymaker may have around an appropriate level of financing to the private sector.
Nonetheless, these findings should encourage us not to be complacent on matters of credit
supply.
Finally, the EIB presentation provided us with very timely updates on the preparedness of Irish
SMEs for future threats and challenges. The events of the last weeks, following Russia's
invasion of Ukraine and the unfolding human tragedy, have only accelerated the need to ensure
that businesses are investing to improve their resilience to a range of shocks, from climate
change to energy prices and availability, to cybersecurity. Taking an Irish standpoint, it is clear
that more needs to be done in a number of areas. The perceived investment gap is higher
among Irish businesses than across the EU, while the use of external financing is confirmed to
be lower than in other countries. The need for the domestic Irish economy to be a growth engine
itself, above and beyond the extraordinary contribution provided by the multinational sector, is
something we in the Central Bank see as critical to ensuring future economic resilience in a
world of ever-growing uncertainty.
On climate change, Irish businesses are reporting both lower current investments, and lower
levels of investment planning, to address the impact of climate change than their European
peers. The share of Irish businesses reporting investments in energy efficiency was half the EU
average in 2021. It is clear that a continuation of this, in the face of the growing need to build
climate resilience is something we cannot afford as a society or an economy. Perhaps the
events of the last few weeks will provide the sometimes inevitable external catalyst to spur rapid
action.
Interestingly, the EIB survey highlights that roughly one-in-ten Irish firms can be characterized as
finance-constrained, about double the EU average. This confirms the findings of the ESRI and
our own research using separate data sources, which again highlights the benefit of bringing
many perspectives together for the event today to draw strong conclusions on certain matters.
These represent dramatic reductions in the share of businesses experiencing financial
constraints when compared to the pre-2013 period. However, they suggest that there remains
room for additional entry of specialist finance providers, or additional Government interventions,
to fill remaining financing gaps.
Our own statistics team have highlighted in recent years the emergence of non-bank financial
intermediaries as an additional source of financing for many SMEs, most notably in the real
estate sector, but nonetheless accounting for a quarter of all new lending in recent years across
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the SME sector in aggregate. The evolution of this novel flow of financing, along with a more
thorough assessment of both the benefits it brings to the local economy and the risks associated
with these intermediaries, will remain a priority topic for us.
I now formally close the event, and wish you all the best.
Go raibh míle maith agaibh go léir agus slán agus beannacht.
1
12% of SMEs surveyed "Strongly Agree" that a lack of financing was a barrier investment in 2020, while another
21% "Agree".
2
Heffernan et al. (2021)