Europe needs more diversity in financing

Europeans should have better access to alternative funding, such as venture capital or equity, instead of relying mostly on bank credit or retained earnings to finance investments, experts said at Finance Estonia conference on Wednesday.

„Credit availability in many [European] countries is problematic,” Niall Bohan, Head of Unit for Capital Markets Union in European Commission, said at the conference, giving examples of several different EU member states where banking system is still trying to cope with the aftermaths of the recent financial crisis. „Our last mission was about putting out fires in the banking system.”

Bohan added that the EU should observe more closely how financing issues are dealt with in the United States where enterprises have easier access to wider selection of financing tools than in the EU. „We don’t need to become American, but we need to become a bit more American than we are at the moment,” Bohan said. „We have failed to build a functioning venture capital market in Europe. 75% from households and corporate funding comes from banks. That’s the problem we have.”

He explained that if venture capital markets in Europe would have been as deep as they are in the US, more than 4000 additional companies could have been financed during the last five years. It would have meant additional capital of 90 billion euros. Bohan added that it is crucial to make it easier for companies to go public and improve access to secondary bond markets.

One of the initiatives that the European Commission is looking into to improve the situation is a plan to create a Capital Markets Union (CMU) that would create deeper and more integrated capital markets in all 28 EU member states. With the CMU, the Commission will explore ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross border capital flows and improving access to finance for businesses, particularly small and medium size enterprises (SMEs).

„Europe has some of the largest companies in the world, but at the same time it has many SMEs. Vast majority of firms by numbers are SMEs,” said Richard Fenner from The CityUK, adding that medium size enterprises that need alternative financing opportunities most should be at the focus of CMU as smaller SMEs are unlikely to use financing from capital markets directly. „In some countries companies have very easy access to finance, in some not so much. Smaller firms tend to rely on retained earning os bank facilities to finance operations and expansion.”