benoit cœure : sme financing – a euro area perspective speech by mr benoit cœure, member of the executive board of the european central bank, at the conference on small business financing, jointly organised by the european central bank, kelley school of business at indiana university, centre for economic policy research and review of finance, frankfurt am main, 13 december 2012. * * * ladies and gentlemen, 1 it is a pleasure to welcome you to the conference on “ small business financing ” organised jointly by the european central bank, the kelley school of business at indiana university, the centre for economic policy research and the review of finance. at the ecb, we regard small and medium - sized enterprises ( smes ) as a crucial component of the euro area economy. indeed, our deliberations on monetary policy systematically take into account the financial health of, and the growth prospects for, euro area smes. in particular, the financing environment and access to finance for euro area corporates are important elements in our policy - making process, both for standard and non - standard monetary policy decisions. to illustrate the importance of small businesses in the euro area, consider the following facts : smes constitute about 99 % of all euro area firms, they employ around three - quarters of euro area ’ s employees, and they generate around 60 % of value added. at the same time, unlike large firms which are generally more profitable and have access to alternative sources of finance, such as bond or equity finance, smes are highly dependent on bank loans and credit lines. due to asymmetric information and a higher risk of failure2, smes tend to face higher costs for bank finance and higher rejection rates than larger firms. while finding customers – potentially due to weak aggregate demand – is usually cited as a bigger problem for smes than access to finance, it is still the case that they are particularly vulnerable to adverse real - financial feedback loops or supply disruption in the provision of bank credit. nevertheless, the years prior to the financial crisis were a period of smooth transmission of monetary policy, and there was little evidence that euro area smes were constrained over and above levels expected in the context of a sound financial system. after mid - 2007, however, the costs of finance started to rise and access to finance started to deteriorate relative to the pre - crisis period. in some euro area jurisdictions, the financial crisis first and the sovereign debt crisis later led to a reduction of the supply of credit to both

lending substantially less on the syndicated loan market than otherwise similar banks with negligible exposure to foreign sovereign debt under stress ( chart 4 ). this overall reduction in lending is not driven by changes in borrowers ’ see the 2004 business environment and enterprise performance survey by the world bank and the european bank for reconstruction and development. financial leverage is defined as the ratio of the sum of debt securities and bank loans to total assets. bis central bankers ’ speeches demand and / or quality or by other types of concurrent balance sheet shocks. part of the effect is due to the fact that investors update their views on the capacity of the domestic sovereign to support the banking system ( the bailout channel ). in addition to that, syndicated lending in the countries that have experienced the highest sovereign debt stress has been rebalanced away from domestic lending, reflecting deteriorating profit opportunities at home. this is markedly different from the “ flight home ” effect observed during the 2008 – 09 financial crisis. 5 syndicated lending, however, targets large non - financial corporations and so studies based on such data do not easily lend themselves to conclusions on the effects of the sovereign debt crisis on sme access to finance. moreover, large public firms routinely substitute corporate debt for bank loans, especially during financial crises, 6 a shock - absorbing mechanism that is not available to smes. a simple comparison between very small loans ( typically to smes ) and very large loans ( typically to large corporations ) shows a substantial divergence across euro area jurisdictions which has worsened since the beginning of the sovereign debt crisis ( chart 5 ). more detailed information on sme access to finance can also be extracted from the ecb ’ s biannual survey on access to finance of smes in the euro area ( safe ). the survey suggests that the number of firms citing access to finance as the biggest problem they face has increased from less than 15 % in the first half of 2010 to 18 % in the first half of 2012 ( chart 6 ). at the same time, firms do not report an increase in financing needs ( chart 7 ), implying that loan supply factors dominate. while this picture is purely descriptive, the safe also contains detailed firm - level information that allows us to calculate a component of credit constraints which is independent of agency problems. preliminary analysis suggests that in 2010 and 2011, firms in countries whose sovereign debt was under stress faced on average a 20 % higher probability of being credit constrained7 than identical german smes. when decomposing the country - level