The Capital Markets Union (‘CMU’) is one of the EU Commission’s flagship projects. It is a policy initiative that is meant to be about market building. It is supposed to create the conditions for an integrated market for capital which complements the banking sector and helps to bring about a more diversified financial system. At the heart of the Commission’s market building strategy is its White Paper on building a CMU. The White Paper sets out a list of policy actions. These actions are meant to benefit a range of actors, notably small and medium sized enterprises (‘SME’s). SMEs were among the victims of the financial crisis, especially as banks tightened their lending policies in the years that followed the financial crisis. Given SMEs’ importance for the real economy, SME funding has not surprisingly become a focus of attention for policy-makers around the world.
SME funding can be viewed as suffering from several problems. Among them are informational issues which affect both the funding demand side and the funding supply side. They make it more difficult for SMEs to navigate the funding market and identify funding options. They also make it harder for finance providers to assess the creditworthiness of SMEs. The White Paper attempts to identify solutions to these issues. Among the policy measures which it puts forward is a set of actions on ‘overcom[ing] information barriers to SME investment’. The immediate objective of these measures is to improve access to finance for SMEs (a long-standing objective of the Commission), but also, crucially, to offer SMEs a more diverse range of non-bank funding options. This is in accordance with the White Paper’s broader objective of creating the conditions for the development of a more balanced financial system that is less based on bank-based finance.
In my paper ‘Market building and the Capital Markets Union: addressing information barriers in the SME funding market’, I take a closer look at the Commission’s strategy on overcoming information barriers. The Commission’s ambitions are by no means small. There is a wealth of empirical research on the funding behavior of SMEs. Empirical data shows consistently that SMEs prefer bank-based finance to non-bank finance. Moreover, the amount of external finance which SMEs require is relatively small. Empirical data shows that in the EU most SMEs will aim to obtain external funding of less than 1,000,000 euros in order to achieve their growth ambitions, with the largest proportion of SMEs (almost one out of four) anticipating that their funding needs will be in the range of 25,000 – 100,000 euros.
The main message of my paper concerns the White Paper’s policy actions on overcoming information barriers in the SME funding market. It argues that there is, in essence, a certain disconnect in the Commission’s thinking between problem definition and policy solution. Specifically, the paper argues that the Commission’s policy solution to overcoming information barriers is at risk of falling short of what is required to deal with informational issues. In response, I suggest in my paper that in order to overcome information barriers to SME investment, a paradigm shift is needed, which is based on three pillars: a greater emphasis on market building; a greater emphasis on information sharing duties as one mechanism that can help to address information barriers; and a market correcting strategy that dovetails with a market building strategy. In developing this line of argument, the paper draws attention to several policy initiatives on information sharing that have emerged outside the CMU context: in the UK, but also at EU level. Banks will be among those that will be required to share data. The paper argues that much can be learned from these initiatives. Recent efforts by the EU legislature to lower the prospectus disclosure burden to attract SMEs away from bank-based finance are unlikely to make a meaningful difference for most SMEs.
Pierre Schammo is a Reader in Law at Durham University, School of Law, and a Visiting Senior Fellow at the European Institute, London School of Economics and Political Science during academic year 2016-17.