Will outsourcing bank lending harm SMEs?

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Many large European banks are considering the possibility of outsourcing their core small business lending to a new group of loan funds. This is a further sign of the growth of the ‘shadow banking’ industry in Europe, a market that has already gained in importance in the US. (See graph attached.)

‘Shadow banking’ (good title for a film thriller) is nothing shady, it’s a phrase used to encompass a broad range of institutions and mechanisms, from wholesale finance to peer-to-peer lending and even pay day loans.

UBS and RBS are two of a number of banks that have discussed with specialised loan funds how they might give these funds access to their corporate client bases. The initiative comes as concern grows over the likelihood of sharp ‘deleveraging’ across the European banking sector. According to last month’s analysis, the IMF’s report on 58 of the continent’s largest banks predicted that the European financial institutions look set to shrink their shrink their balance sheets by about $2.6 trillion over the next 18 months.

Most of the deleveraging is expected to come from the sales of securities and non-core assets, however the IMF sees credit supply shrinking by 1.7% as banks reduce lending to businesses and private households. However, outsourcing to ‘shadow banking’ might ease funding to businesses, particularly as it has been demonstrated that bank lending has fallen in recent years.

The assessment by the IMF highlights that SMEs who rely too much on bank lending may be badly affected by bank deleveraging. This begs the question that maybe traditional bank finance is not really the most appropriate method for start-ups and early stage companies to use. Regulator’s high capital requirements have damaged banks’ urge to lend. Agreements like Basel III have created the ideal conditions for ‘shadow banking’. Now more than ever it seems appropriate that businesses should turn to the private sector for an alternative source of working capital finance. Many relatively young tech start-ups offer options that are different from traditional bank products, from new entrants to the banking market, to crowd-sourced equity providers, peer-to-peer lending, as well MarketInvoice’s own model of online auctioning for invoice finance.

Further Reading:

• Banks look to farm out SME lending http://www.ft.com/cms/s/0/85ce3bde-9546-11e1-8faf-00144feab49a.html#axzz...

• Shadow banking: destructive and benign http://www.ft.com/cms/s/3/981cb220-8a47-11e1-93c9-00144feab49a.html#axzz...

• IMF: Global Financial Stability Report http://www.imf.org/External/Pubs/FT/GFSR/2012/01/index.htm

• IMF fears $3.8 trillion forced asset sale by eurozone banks http://www.telegraph.co.uk/finance/financialcrisis/9211744/IMF-fears-3.8...

• IMF sees banks deleveraging by $2.6tn http://www.ft.com/cms/s/00078672-8952-11e1-bed0-00144feab49a,dwp_uuid=5c...

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