Saturday, 15 March 2014

Banks vs SME's: Who's the economy after all?

The title of Wikipedia's article on the crisis stars with a word which sums it it all up: Financial. What this means is that unlike others mishaps of the past, this time the trouble was mainly brought by financial institutions who could no longer survive. And since banks are not just like any other institution in the economy (in the sense that they provide the service of moving funds from one place to another, addition to lending) their importance was not big news to most (it was to some who believed that rescuing them was bad. Truth is, if Bernanke hadn't then we would be far worse than the 1930's).

In Europe, even though some of the troubles in the periphery are attributed to excess government spending, the truth is that the financial sector has also been a major cause of pain in at least half the economies in the EU (note that it has also been a problem in the UK, Germany, the Netherlands and Belgium, countries which do not often get the bad publicity of being in trouble). As in the US, governments in the EU rushed to save the banks, in most of the times with good reason. Yet, the emphasis on the banking sector has not stopped there; policymakers' preferences shifted to paying more attention on what the banks need instead of what is necessary for 99% of Europe's businesses: SMEs.

Unlike large businesses, who usually have ties with multiple banks, usually both domestic and abroad and have open lines of credit reaching hundreds of millions, SME's are faced with small business loans and very small credit balances. The increased capital requirements forced on banks and the now extremely picky procedure for securing a loan has brought many SME's to their knees. As the number of loans to the private sector is reduced, the SME owner finds himself without any sources of funding; while the data show that banks are doing better with regards to their loan portfolio, the market has in fact been suffocating.
The sad truth is that while we favour the survival of banks, we should remember that these institutions are mere intermediaries; it is true that the economy will freeze if banks collapse, but the same will occur if more and more SME's bankrupt day after day. Big businesses do not see their lines of credit diminished, but those who count the continuance of their day-to-day operations on checks who take days to clear, struggle with the reality of dying any time soon. Troubles are many, starting from the number of days required for a check to either be returned or cleared varies significantly among countries, (when it could essentially be done in less than a day in most), the increased fees required by banks to either send money abroad (even though SEPA is a major improvement) or to maintain certain accounts and finally the lack of any additional funding are major causes of headaches for people who do not have.

Since the emphasis is on the banks and not on the businesses, confidence that the economy will do better in the future is hard to build. How can the average Joe (and it is on his spending and his investment that we really count on) be convinced that things are doing better when he sees his company in the red, his friends and associates losing money and the business environment he lives in become harsher every day? We cannot de-emphasize the importance of banks but banks are nothing more than a small part of the economy; and since lending is limited (even in the best case scenario) we cannot be just focus on them and expect everything to go better.

I've said it before: we are at the ZLB so monetary policy is out of the question and our governments are constrained on spending making fiscal policy is not an option. All we are left with is confidence; yet, it cannot be raised if banks will not lend and make life miserable for millions across the continent. Yes, we need banks for the economy to move; but banks and the economy need businesses even more if we are ever going to see better days.

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