Joint SME Initiative European Commission, July 2013 1
Table of content 1. Background 2. Commission's proposal 3. Opinion of the HLG 4. Commission's priorities 2
1. Background EU / Commission long history in SME support schemes with EIB and EIF (more than 15 years) In the current MFF, support to SMEs is provided by EU level financial instruments and by Member States through shared management In preparation for the new MFF numerous studies and evaluations for new SME schemes have already been prepared (Commission, Parliament, EIB, EIF) The Commission has acknowledged the findings of these studies and, as approved by the Council, has put more emphasis to support SMEs in the future 3
Current EU supported instruments Structural Funds provide financing to SMEs by SME aid schemes (grants) managed by Member States and regions (EUR 23bn); additional EUR 22bn benefit SMEs indirectly financial instruments managed by the EIF (EUR 1.2bn); national public and private financial intermediaries or fund managers (EUR 7.7bn). EU financial instruments, namely the Competitiveness and Innovation Framework Programme (CIP); the European Progress Microfinance Facility (EPMF), and the Risk Sharing Instrument for Innovative Research oriented SMEs & Small Mid-Caps (RSI) contribute with some EUR 1.5 bn over the period 2007-2013 for lending to more than 350,000 SMEs. 4
Financial instruments in the new MFF Financial Instruments have been subject to numerous evaluations and audits, and lessons learnt have been taken into account in the design of the instruments for the next MFF. Structural and Cohesion Funds plan to scale up the use of financial instruments alongside grants in 2014-2020. Proposals for Horizon 2020 and COSME foresee scaling up of the use of financial instruments. This is backed by new clear rules that will guarantee sound financial management. 5
2. Commission's proposal Take advantage of existing instruments - COSME and Horizon 2020 - which already can (and will do) support SMEs Build on the already existing and politically agreed concept of Joint Instruments, to combine EU level financial instruments and European Structural and Investment Funds. The SME Initiative is only linking these points Combine and fully utilize the EIB and EIF and possibly National Promotional Banks' capacities Act fast and achieve significant impact to: Stimulate SME financing and economic growth Fight fragmentation Develop non-banking financing for SME 6
COSME and Horizon 2020 The inter-institutional discussions on legal bases for COSME and Horizon 2020 are now closed and political agreement with the European Parliament has been reached. This creates a major advantage in terms of speed and readiness of implementation as the EIB/EIF have implementation experience on these two programs. These two agreed legal bases allow already for portfolio guarantees of existing loans and securitisation of existing and new loans SME loans and provide an effective and flexible basis on which the new SME initiative will be plugged in. 7
CPR the new Joint Instruments Joint Instruments: financial instruments that bring together resources from Programmes managed by the Commission (EU level financial instruments) and European Structural and Investment Funds for the achievement of the same policy objectives as EU and ESIF OP instruments, using the same delivery mechanism (i.e. involving the same counterparties) and applying consistent requirements (e.g. terms, reporting, audit, etc.). Differences apply only to eligibility criteria related to the final beneficiaries, in particular the geographical criteria. 8
Proposal: Pooling of resources from New SME Initiative European Structural and Investment Funds (ESIF) COSME & Horizon 2020 EIB and EIF National and Regional Promotional Banks (NPBs). in the form of Joint Instruments Why?: To increase access to finance for SMEs by offering products to banks that are beneficial in terms of liquidity to finance new SMEs loans number of SMEs supported, volume of SME financing capital relief, to the extent necessary to support SME loans.. more value added, more financing to SMEs 9
New SME Initiative-assumptions ASSUMPTIONS for 2014-2020: Member States may decide to voluntarily make available a designated amount of ESIF allocations to the Joint Instruments. Minimum and broad participation are needed to create value added. The assumed amount is EUR 10bn from a EUR 336bn cohesion policy budget. Contributions from EU's COSME (210 mil) and Horizon 2020 (210 mil) Sizeable balance sheet contributions from EIF and EIB (providing guarantees or direct investment) covering Mezzanine and Senior risk Possible contributions from national promotional banks and/ or private investors 10
1. Joint SME Guarantee and Securitisation Instruments for new loans Pooling of COSME, Horizon 2020 and the ESIF and combined with the resources of the EIB and EIF to provide a combination of: guarantees for new SME lending under a Joint Guarantee Instrument guarantees for portfolios of new SME loans for the purposes of securitisation. Such portfolios would need to be built up by the banks in a specified time period (2-3 years) with a view to being securitised. With a blend 75% of guarantees : 25% of securitisation, EUR 10bn from ESIF and EUR 420m from COSME & Horizon 2020 would generate lending to SMEs of an estimated EUR 55-58bn (a leverage ratio of roughly 1:5), benefiting 580,000 SMEs. 11
2. Joint SME Securitisation Instrument for new and existing loans ESIF, COSME, Horizon 2020, EIF, EIB, national promotional banks' funds would be combined for the securitisation of portfolios of SME loans, attracting private investors. Financial intermediaries would be required to finance new loans to SMEs proportionaly to the amount covered by the Joint Instrument. The securitisation of portfolios of existing loans would increase the impact and immediacy of this instrument compared with option 1. EUR 10bn from the ESIF and EUR 420m from COSME & Horizon 2020 would be allocated to generate lending to SMEs of an estimated EUR 65 bn (a leverage ratio of roughly 1:6), benefiting around 650,000 SMEs. 12
3. Joint SME Securitisation Instrument for new and existing loans, with risk pooling Similar to Option 2 but would include the possibility to pool risks, allowing for a much higher leverage than under the previous options. Allows providing immediate capital relief and liquidity to banks which facilitates the swift provision of new loans to SMEs. EUR 10 bn from the ESIF and EUR 420 m from COSME & Horizon 2020 would be allocated to generate lending to SMEs for an estimated amount of EUR 100 bn (a leverage ratio of roughly 1:10), benefiting around 1,000,000 SMEs. 13
3. The HLG Opinion The High Level Expert Group (HLG) brings together the ECB, EIB, EIF and around 12 market participants The HLG has analysed each option against 12 policy criteria and presented its opinion on 16 July to the EFC Final assessment depends on priority and relative importance assigned to the various policy criteria by EU Member States Further work has been assigned to the HLG on investor demand for end of August 14
HLG's matrix Criteria Option 1a Option 1b Option 2 Option 3 (w/ Pooling) Leverage [as indicated by COM and EIF in the HLG 1:5 1:5 (no participation of private investors) 1:6 (assumes participation of private investors) Up to 1:10 (assumes participation of private investors) discussions] Speed of structuring and signature High Medium High + High - Speed of reaching final SME beneficiaries Relative complexity in structuring Slow (ramp-up period) Low Medium / high (if national promotional banks involved) Slow High High (ramp-up period) (existing loans) (existing loans) High High Highest (Regulatory) Capital relief Sure Structured (subject to national regulatory rules) Structured (subject to national regulatory rules) New direct funding No No Yes Yes Contribution to development of securitisation markets No Yes (over time; ramp up period) Yes Yes Contribution to overcoming financial fragmentation Low (indirect) Low (indirect; through pricing of EIB investment in senior tranches) Better (indirect; through pricing of EIB investment and through progressive revitalisation of securitisation markets) Structured (subject to national regulatory rules) Best (indirect; through pricing of EIB investment and through progressive revitalisation of securitisation markets boosted by significant political signal)
HLG's matrix (cont) Criteria Option 1a Option 1b Option 2 Option 3 (w/ Pooling) Adaptability, i.e. to national regulatory requirements Low Average Good (funded and unfunded transactions. Transaction specific credit enhancement) Average (funded and unfunded transactions) Marketability vis-a-vis banks/originators Easy Low Easier for bigger banks (depends on whether transaction is funded or unfunded) Easier for bigger banks (depends on whether transaction is funded or unfunded) Marketability vis-a-vis investors (in the short term) N.A. Low (ramp up period) Medium (mainly due to regulatory constraints) Medium (mainly due to regulatory constraints) Marketability vis-a-vis NDBs Medium (relative size of the product vis-à-vis national products) Attractive when cost of funding is medium-low or for those willing to take mezzanine risk Attractive when cost of funding is medium-low or for those willing to take mezzanine risk Attractive when cost of funding is medium-low or for those willing to take mezzanine risk
4. Commission's approach Need to fight fragmentation: fragmentation leads to higher lending rates to SME s Over the medium term SME financing should be complemented with non-banking resources (capital markets and private investors) Member States keep the choice to run only national SME support programs or dedicate a small part of their ESIF funds to support the SME Initiative as a Joint Instrument Confidence in the willingness and capability of the EIB and EIF to structure and manage the Initiative; add value to action at national level by leveraging member states ESIF resources Propose the necessary "enabling" conditions in CPR to allow member states to chose appropriate option going forward 17