why sme lending is currently highly concentrated among a handful of large banks that have the scale and capacity to diversify idiosyncratic risks by investing or lending to a broad enough range of smes. in other words, smes will remain largely dependent on a subset of banks for the foreseeable future. the key question then becomes, in the context of an already - accommodative monetary policy stance, how the role of banks in providing sme finance be structurally improved? i believe there are two channels. first, through the asset quality review transparency will be increased and investors ’ confidence can be restored. removing the blockages created by non - performing legacy assets can unclog banks ’ balance sheets. once banks ’ balance sheets are cleansed and strengthened and the market is reassured about the stability of european banks, they should be able to begin lending again. second, connecting sme financing needs with the funds of bank and non - bank investors via securitisation of sme loans can assist banks ’ ability to fund and distribute risk. both channels have the advantage of not interfering with the allocation mechanism of a market economy. as the asset quality review is already receiving much attention, thus i will focus the remainder of my talk on the second channel. bis central bankers ’ speeches the benefits of sme loan securitisation let ’ s pull together what we know right now. first, we know that sme lending in weak economies is risky. second, we know that many banks are reluctant to take on additional risk on their balance sheets and indeed are trying to deleverage and reduce their balance sheet risks. third, we know that non - bank investors in many parts of europe and abroad are seeking investment assets with maturities and returns that match their liability profiles. i am thinking both of insurers and pension funds, but also alternative investors such as hedge funds. there are also many banks willing to hold abss 1, but are reluctant to do so, for reasons that i will address later. so we have a situation where certain banks own assets with risks and capital charges that they do not wish to bear. on the other side, there are investors who are willing to bear those risks. in my view, this is a match that should happen in an efficient financial system, and securitisation of sme loans is the way to achieve it. what is more, the funds received by banks from transferring bundled sme loans to outside investors can help support

yves mersch : banks, smes and securitisation speech by mr yves mersch, member of the executive board of the european central bank, at the deutsche borse – clearstream “ exchange of ideas ” event, london, 7 april 2014. * * * overcoming the current challenges faced by small firms ladies and gentlemen, it is a pleasure to speak at this conference today. in my remarks i would like to address what i see as the key challenge in the euro area today : how to fix the flow of credit to the real economy. during the crisis the credit transmission channel has become impaired in three mutuallyreinforcing ways. first, as regards quantity, aggregate loan growth continues its steady deceleration and remains very heterogeneous across the euro area. second, as regards price, low eurosystem policy rates are simply not being passed on in certain countries. third, as regards distribution, smaller firms appear to be suffering more from price and quantity effects, especially in weaker economies. certainly, the reasons for these blockages relate in part to demand - side factors, but the supply - side – banks ’ capital levels and risk assessments – remains an important part of the story. a malfunctioning credit channel has several unwelcome consequences for the real economy. it impairs the transmission of monetary policy throughout the euro area. for borrowers in weaker economies that are undergoing a relative price adjustment, tight credit means that real interest rates are rising while relative prices are falling, thus pushing up the real cost of servicing debt. and it also impairs the allocative efficiency of the real economy, as credit is allocated away from the smaller and younger firms that are by nature more risky yet create the most net jobs. as 99. 7 % of firms in the eu are smes, this is a crucial issue to be solved. the fortunes of the euro area economy are intertwined with the financial health of smes. one solution to this problem could be for firms to bypass the bank lending channel and replace bank finance with capital market finance. this trend has already been observed for larger corporates, with european corporate bond issuance expanding rapidly in the last few years. however, for smes accessing non - bank finance is often simply not an option. indeed, non - specialised investors and lenders are often wary of firms facing high degrees of competition and limited growth prospects, particularly if those firms have only existed for a short while. that is