The financing mix of the economy

With their strategic agenda, the banks are undertaking to continue to finance the economy. But they realise that they will not be able to fulfil this task alone precisely because of the economic climate, the changed financial landscape, the amended and constantly evolving regulations, and the sometimes-unrealistic demands of society. The financial sector is therefore seeking alternatives to the exclusive bank-based financing of certain types of projects in the long term.

The starting point of such an exercise is that financial institutions still want to play their role as financers, in the short, medium and long term. But they also want to look at other operators or alternative methods so as to be able to continue to guarantee part of this financing mix.

The financing of the economy has many facets. The ideal financing solution for a company varies according to whether the business needs credit in the short or long term. It also changes depending on whether the company is a young start-up or an established business, or whether it carries a limited or higher risk.

It is therefore not logical to only look to the banks to finance the economy, especially now that the capital requirements under Basel III have restricted the scope of financial institutions as regards lending. In recent months, the financial sector has therefore looked in detail at alternative ways of also continuing to guarantee the financing of the economy in the future.

Lending by the banks remains a key factor in the model they have developed. Financial institutions will also have to continue to convert savings into loans to households, businesses and public authorities in the future, both in the short and long term. They will continue to provide investment credit and export loans in the forms available to them.

But there will also be an important role in the future for other operators in the world of financing. For these other operators, the banks will at best play an intermediary role. For debt financing in the long term, banks can play their role in issuing bonds and public loans, or in raising capital for SME funds. Banks are likely to play a much smaller role in initiatives to stimulate venture capital, such as the development of the win-win loan. However, these initiatives are also necessary to complete the financing mix for the economy. 

Regional governments

The financing of the economy, and the mix needed to achieve it, was also the main subject on the table at the Banking Plan discussions proposed by Flemish Minister-President Kris Peeters in the autumn of 2012. The Banking Plan aims to promote the financing of the economy and strengthen the business fabric in Flanders through a mix of banking and alternative financing methods.

In parallel with the discussions of the Banking Plan in Flanders, talks also began with the Walloon and Brussels governments. In all these forums, the financial sector defended and supported the idea of the financing mix where necessary.

A round-table discussion with the Walloon government examined what initiatives could be taken to stimulate the financing of the economy, and more specifically of Walloon SMEs. Following on from this discussion it was decided, depending on the target group, to set up working groups together with Febelfin and various banks. These working groups will examine what initiatives can be taken and what constructive role the banks and the public authorities can play in that regard. Similar talks with the Brussels government have begun.

Febelfin and the Belgian banking sector has also launched a dedicated website containing all information on credit supply to businesses: www.financementdesentreprises.be.

The reflections on alternative forms of financing for the economy produced various specific approaches, two of which are currently being developed: the structure for SME funds and public loans. Lines of investigation were also opened into ways of helping meet certain needs for financing exports.

SME funds

Various specific agreements were made regarding the SME funds during the talks on the Banking Plan with the Flemish Government. One or more funds will raise a total of EUR 1 billion to be able to provide loans of more than 5 years to Flemish SMEs.

According to one approach, the banks would contribute EUR 150 million in capital, and if necessary bear the initial credit losses on the loans to the tune of EUR 75 million (the so-called first loss).

This buffer of 7.5%, for which the financial sector would be responsible, is much higher than the average default rate on Belgian business loans. If, contrary to expectations, the losses are much higher, the public authorities would guarantee the next EUR 75 million in credit losses via the Gigarant guarantee scheme.

Thanks to that safety net of EUR 150 million, the fund or funds would be able to benefit from a higher credit score. This means it would become easier to obtain the remaining EUR 850 million from institutional investors that can make the money available over a longer period (such as pension funds or insurance companies, for example) if the financial institution deems that opportune.

Because of the way the SME funds are constructed, the risk to subscribers is limited in various ways. For instance, since the financial institutions cover the initial losses investors are protected from these first credit losses. But because the banks will take the first losses, the financial institutions simultaneously receive extra encouragement to accept more creditworthy files. Poorer files increase the risk of losses that must initially be covered by the institution.

The SME funds must benefit the financing of the SME market, which is under pressure as a result of the economic slump. The commitment regarding the establishment of such a fund (or such funds) to the value of EUR 1 billion was included in the Flemish Banking Plan. Similar initiatives are also being examined at the Brussels and Walloon level.

Public loans

The public authorities recently took the initiative to set up thematically linked public loans.

These public loans are intended to offer financial institutions the possibility of financing long-term projects such as the building of schools and retirement homes, SME credits with a term of more than 7 years, or projects of specific social value on attractive terms. In concrete terms, savers could subscribe to specific, large-scale projects. The return on their investment would be fixed in advance, as with a deposit certificate.

The public loan is a banking product. This means that the savings raised for a public loan will have to be assigned to a predetermined area of use (for example, ecological investments), but that the deposits still fall under the protection of the deposit guarantee system (DGS). This means that the savings used to provide public loans will count towards the protection up to EUR 100,000 enjoyed by each saver. The public loan will also continue to appear on the banks’ balance sheets. It would have a longer term (five years or more) and benefit from reduced withholding tax.

The idea for a public loan comes from the extensive reflection exercise that Febelfin conducted further to its strategic agenda. The federation of the financial sector is therefore contributing as a constructive partner to the development of the policy initiative that will help provide a solution to the need for financing in the long term.