SME Funding Without Banks? On the interplay of banks and markets

Publication: White Paper No. 44
Topic Area: Financial Institutions, Financial Markets
Authors: Günter Franke,
Jan Pieter Krahnen
Date: Jan 2017
Keywords: SME, funding, capital markets, lending instruments, banks
Abstract:

The Capital Markets Union-project of the European Commission aims for an increase of market-based debt financing of small and medium-sized enterprises (SMEs), complementing bank lending. In this essay we argue that rather than focussing on pure non-bank lending, a reasonable mix of bank- and market-based financing should be considered. Banks are said to have a comparative advantage in critical lending functions such as credit screening, debtor monitoring and debt renegotiation. All forms of lending require a persistent skin-in-the-game of critical players in order to be effective. The regulator should insist on full disclosure of skin-in-the-game, thereby improving capital allocation and reducing systemic risks.

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