luigi federico signorini : building a strong financial system to assist innovative smes remarks by mr luigi federico signorini, deputy director general of the bank of italy, at the eu finance day for smes, italy, rome, 18 october 2013. * 1. * * small and medium - sized enterprises in the european economy small and medium - sized enterprises ( smes ) are a key feature of the european economic landscape. they account for 99 per cent of all eu firms, employ 67 per cent of all payroll workers and generate 58 per cent of value added. their contribution to economic activity varies significantly from sector to sector ; in 2010 their contribution to value added ranged from under 25 per cent in energy to over 80 per cent in construction and real estate. cross - country variability is also significant : smes ’ share was lower in the united kingdom ( 50 per cent ) and higher in portugal, spain and italy. in italy smes account for about 80 per cent of total employment and 68 per cent of business value added. in 2011 micro enterprises – firms with fewer than 10 employees – accounted for around a third of the italian firms ’ total value added, 8 percentage points higher than the european average. smes rely heavily on internal sources ( retained earnings ) to finance ongoing activities and investment ; their funding consists more of debt than equity and, among debt instruments, bank loans outweigh securities. the role of banks in smes ’ financing is linked to their ability to reduce the large information asymmetries typical of small firms. it is favoured by firms ’ inherent difficulty in going public, and sometimes their reluctance to do so, which limits their ability to place securities directly with non - bank intermediaries. specifically, smes ’ access to capital markets is often hampered by high fiscal and administrative costs, lack of transparency and the low propensity of family businesses to dilute control. access to finance is a major challenge for smes in normal times ; it has been much more so in europe over the past five years. the deep recession that hit most countries – a double - dip recession in some cases – dried up internal resources ; recurrent crises of confidence in financial markets, which put a brake on funding flows, and mounting bad loans made banks tighten their lending policies. these problems have been addressed with a variety of economic policy measures. central banks have used monetary tools to ease the liquidity crisis of the financial sector ; european institutions and national governments have used public resources both to help

high costs and limited availability of wholesale funding, and has affected domestic credit conditions. while the ecb ’ s actions have eased tensions in the short term, a more structural action is required to make europe ’ s banks work as one system, one market. in a heavily regulated industry like banking, the single market requires a single framework for regulation and supervision ; otherwise it cannot work properly, especially in difficult times. the creation of the banking union is a keystone of the institutional reform to ensure stability in the euro area and in the eu at large. it should eliminate fragmentation, leaving only that portion of extra funding costs for banks that is associated with genuine extra credit risk. the banking union comprises three key components : a single supervisory mechanism ( ssm ), centred on the ecb and based on the expertise of national supervisory authorities ; a single resolution mechanism ( srm ), which is central to ensuring that the responsibilities of supervising banks and managing their recovery or resolution are effectively aligned ; and a harmonized deposit guarantee fund financed by the industry, whose mission is to prevent bank runs. in the summer of 2012 the european leaders decided to give priority to the construction of the first component, the single supervisory mechanism, comprising the ecb and the national supervisory authorities. but this is a three - legged animal : it cannot be asked to stand on one foot. the resolution part is already under development. the third leg, a common deposit guarantee fund, must remain a target. the purpose of the banking union is to bring substantial benefits to the single market, improve the monitoring, control and mitigation of the systemic risks that stem from the interconnectedness of banks and markets, break the perverse feedback loop between banks and sovereigns and counter the ring - fencing trends observed in the last years, thus fostering financial integration. 5. smes and the financial sector policies to improve the institutional environment must be complemented by actions to foster an efficient and diversified financial system that can adequately serve a set of enterprises whose financing requirements are quite heterogeneous, depending on firms ’ characteristics. for smaller firms, which will continue to rely heavily on bank loans, it is essential that the prudential rules on bank capital be designed so as to avoid a negative impact on credit supply. the basel ii framework ( crd in europe ), which went into effect in 2007 – 08, had already envisaged more favourable prudential treatment for loans to smes than other corporate loans, justified by their reduced systemic