benoit cœure : sme financing, market innovation and regulation speech by mr benoit cœure, member of the executive board of the european central bank, at the plenary session 11 “ challenges and feasibility of diversifying the financing of eu corporates and smes ”, at the eurofi high level seminar, organised in association with the irish presidency of the council of the eu, dublin, 11 april 2013. * * * i wish to thank annalisa ferrando, petra kohler - ulbrich and balazs zsamboki for their inputs. i remain solely responsible for the opinions contained herein. why smes are special small and medium sized enterprises ( smes ) are special. they are the backbone of the euro area economy : they constitute about 98 % of all euro area firms, it employs around threequarters of the euro area ’ s employees, and they generate around 60 % of value added. 1 these figures happen to be even higher in those jurisdictions which have been most affected by the crisis. smes are also specific in their financing structure. they turn more often to banks for their external financing than large firms but, at the same time, they are generally more likely to experience greater difficulties in obtaining funds. there are structural reasons for this, notably they are more opaque and their corporate capabilities more difficult to assess, because their financial statements are less informative and their credit histories are usually shorter. these characteristics are compounded by fixed costs in external assessment and monitoring. all this leads to higher transaction costs, especially those stemming from asymmetric information, for smes. it is therefore to some extent inevitable that credit sources for small firms tend to dry up more rapidly than for large companies during economic downturns, thereby disrupting the business and investment activities of these firms to a greater extent. 2 and this has indeed been the case during the crisis in the euro area. the creditworthiness and financial health of smes have deteriorated more sharply than those of large firms, and the protracted period of weak economic conditions has exacerbated the asymmetric information challenges of smes. the statistics currently available do not provide timely and high - frequency hard data on the balance sheet position of a representative set of smes for the euro area. yet, based on survey information provided by the ecb ( the survey on access to finance of enterprises, safe ), we see that smes ’ profits, liquidity buffers and own

buffer were calibrated on the basis of an historical examination of the individual loss experiences of banks in the united states and six other countries. a macroprudential perspective on capital requirements complements the microprudential orientation of basel iii. there would be very large negative externalities associated with the disorderly failure of any sifi, distinct from the costs incurred by the firm and its stakeholders. the failure of a sifi, especially in a period of stress, significantly increases the chances that other financial firms will fail, for two reasons. first, direct counterparty impacts can lead to a classic domino effect. second, because losses in a tail event are much more likely to be correlated for firms deeply engaged in trading, structured products, and other capital market instruments, all such firms are vulnerable to accelerating losses as troubled firms sell their assets into a declining market. a sifi has no incentive to carry enough capital to reduce the chances of such systemic losses. the microprudential approach of basel iii does not force them to do so. the rationale for enhanced capital requirements for sifis is to take these costs into account, make sifis less prone to failure, and thereby to make the financial system safer. an ancillary rationale is that additional capital requirements could help offset any funding advantage derived from the perceived status of such institutions as too - big - to - fail. of course, if a sifi could be resolved in an orderly fashion, negative externalities could be greatly reduced. the special resolution regime in dodd - frank aims at just such an outcome. the fdic is investing considerable time and talent into making that outcome more likely, and thus bringing a greater measure of market discipline to large financial firms more generally. together with the fdic, the federal reserve will be reviewing the resolution plans required of larger institutions by dodd - frank and, where necessary, seeking changes to facilitate the orderly resolution of those firms. still, we must acknowledge that we are some distance from achieving this goal. the legal and practical complexities implicated by the insolvency of a sifi with substantial assets in many countries will make its orderly resolution a daunting task, at least for the foreseeable future. 2 similarly, were several sifis to come under severe stress, as in the fall of 2008, even the best - prepared team of officials would be hard - pressed to manage multiple resolutions simultaneously. two examples of these complexities are that placing a financial firm into