Mr. Wolfgang Bergthaler, Mr. Kenneth H Kang, Ms. Yan Liu, and Mr. Dermot Monaghan
The global financial crisis has left a large private sector debt overhang and high levels of non- performing loans (NPLs) in several European countries. Small and medium-size enterprises (SMEs) represent a significant and weak segment of the nonfinancial corporate sector. SMEs face a number of legal, financial, and regulatory challenges to restructuring that differ from those of larger corporates, such as a rigid and costly insolvency regime, a higher fixed cost to loan restructuring, and the lack of alternative sources of financing. Given SMEs’ large presence and close links to the banking system, addressing the SME loan problem in Europe will be critical for strengthening bank and corporate balance sheets and supporting a more robust and sustained recovery.
Mr. Shekhar Aiyar, Mr. Ali J Al-Eyd, Ms. Bergljot B Barkbu, and Andreas Jobst
Small and medium-sized enterprises (SMEs) account for a disproportionate share of output and employment in Europe but are still highly dependent on bank finance, which dried up or became prohibitively expensive during the crisis. Broader access to alternative, long-term finance through securitization would limit their exposure to banking sector difficulties and thus help revive credit. The SDN examines the various impediments to the development of a well-functioning and liquid securitization market in Europe and proposes a comprehensive multi-faceted strategy to support its development through regulatory reforms and infrastructure development together with targeted and time-bound official sector support. This would require (i) greater regulatory differentiation between securities of different quality and underlying asset structures; (ii) harmonized national enforcement and insolvency frameworks and standardized reporting requirements; and (iii) greater capacity of EU authorities to support new issuance. These measures would be underpinned by a pan-European definition of high-quality securitization (HQS) comprising simple, transparent and efficient asset structures receiving preferential regulatory treatment.
Mr. Federico J Diez, Mr. Romain A Duval, Jiayue Fan, José Garrido, Sebnem Kalemli-Ozcan, Chiara Maggi, and Mr. Nicola Pierri
The COVID-19 pandemic has increased insolvency risks, especially among small and medium enterprises (SMEs), which are vastly overrepresented in hard-hit sectors. Without government intervention, even firms that are viable a priori could end up being liquidated—particularly in sectors characterized by labor-intensive technologies, threatening both macroeconomic and social stability. This staff discussion note assesses the impact of the pandemic on SME insolvency risks and policy options to address them. It quantifies the impact of weaker aggregate demand, changes in sectoral consumption patterns, and lockdowns on firm balance sheets and estimates the impact of a range of policy options, for a large sample of SMEs in (mostly) advanced economies.