The European Central Bank (ECB) published today the yearly analytical report collecting the result of the  Survey on the Access to Finance of Enterprises (SAFE) for the year 2017. The survey is conducted on a sample of Small-Medium Enterprises (SME) across Europe. Table 1 summarizes the number of SMEs involved in the survey for each member of the European Union (EU).

The results refer to the period from October 2017 to March 2018. This survey round was conducted between 12 March and 20 April 2018. The total EU countries sample size was 16 656 firms. The euro area sample size was 11 733 firms, of which 10,720 (91%) had fewer than 250 employees.

Table 1 : SMEs sample by EU country (Source: ECB, SAFA 2017)

The main results are summarized in the ECB press release of the SAFA 2017.

• SMEs continued to indicate improvements in availability of external sources of finance
• Lower, albeit still high, percentage of SMEs reported increasing turnover and profits
• Fewer SMEs reported falling interest rates on bank loans

The financial situation of firms further improved, albeit at a slower pace than in the previous survey round. From October 2017 to March 2018, the percentage of euro area SMEs reporting a higher turnover decreased (24%, down from 27%). The moderation in turnover was also reflected in profits, as 4% of euro area SMEs reported increases, down from 5%, in a context of growing labour costs (50%, up from 49%) and other production costs (54%, up from 48%).

In net terms, SMEs continued to indicate improved availability of bank loans (14%, from 12%), with the highest percentages in Spain (24%), Portugal (19%), and Ireland (18%). SMEs attributed these improvements to a persistently high willingness of banks to provide credit (19%, from 18%). Although Greece continued to lag behind the other euro area countries, there are also signs there of an incremental improvement in the willingness of banks to provide credit since the beginning of 2017.

SMEs signalled that the fall in interest rates on bank loans became more muted (with a net percentage of SMEs confirming -1%, compared with -5% in the previous round). At the same time, they registered a moderate increase in other costs of financing, such as charges, fees and commissions (26%, from 30%).

To emphasize the importance of banks for the financing decisions of firms, this survey round included ad hoc questions on firm/bank relationships along three dimensions: number, duration and exclusivity. Results suggest that SMEs tend to do business with less than three banks, on average. Long-term relationships prevail across different firm sizes, however, the concentration of loans varies across countries, reflecting the heterogeneity of financial structures across the various euro area countries.

SAFE Report 2017 (PDF)

Yves Mersch, Member of the Executive Board of the ECB, at the Frankfurt Finance Summit, Frankfurt, 29 May 2018 illustrated the key role played by central counterparties in Europe. During the 2008 financial crisis, counterparty risks became infamous. The failure of Lehman Brothers and the large losses suffered by AIG in over-the-counter derivatives markets revealed that there were counterparty risks throughout the entire financial system. This was due to the domino effect of counterparty defaults in leveraged products.

In the 2009 summit in Pittsburgh, G20 countries agreed to move all standardised derivatives contracts to clearing through central counterparties (or CCPs), yet CCPs can only make the financial system safer if they are safe themselves.

In the European Union, they are subject to a comprehensive regulatory framework. The European Market Infrastructure Regulation (or EMIR) ensures that they hold robust resources to deal with financial distress. The global regulatory push towards central clearing has contributed to making CCPs extremely important parts of the global financial system. In 2009, just 40% of all interest rate derivatives contracts were cleared through CCPs, but by 2017 this had increased to 83%.

The rising importance of CCPs means that their supervisory framework needs to be reformed. Most clearing is now done across borders and is strongly concentrated in a limited number of EU CCPs, which have become systemically important for the EU as a whole.

Furthermore, two of these CCPs are based in the United Kingdom and they currently clear around 95% of euro-denominated interest rate derivatives and around 30% of euro-denominated repos. Thus, a significant disturbance involving a major UK CCP could affect financial stability and market functioning across the EU.

On top of this, most of the liquidity provided by central banks tends to be channelled through the repo market. The United Kingdom’s withdrawal from the EU means the supervisory framework for non-EU countries must be adapted. EU authorities must continue to be able to not only closely monitor UK CCPs but ensure they comply with EU regulations.

In this sense, precautions have to be taken to ensure that CCPs do not become a weak point for monetary policy and the currencies issued by central banks. CCPs can pose significant risks to the smooth operation of payment systems and to monetary policy transmission in times of market stress.

For example, market volatility or failures in CCPs’ risk management may affect liquidity within the financial system and that of CCP users, who are typically monetary policy counterparties and key participants in payment systems. In extreme situations, liquidity shortfalls could foster contagion and lead to CCPs and banks becoming distressed.

This could mean the ECB needs to provide liquidity to systemic CCPs or to their members to ensure that payment systems continue to function smoothly and that monetary policy can be transmitted effectively. It is clear that, in such cases, liability and control need to be well aligned: the ECB must be able to monitor and control the risks posed by CCPs.

CCPs are also directly relevant for payment systems. Cleared markets represent a significant share of financial markets as a whole, meaning that CCPs are settling large payment volumes. In order to ensure that payment systems continue to function smoothly, the ECB must ensure that CCPs have appropriate arrangements in place for liquidity management and settlement in euro.

Moreover, in the past CCPs have increased margins and collateral haircuts beyond the levels required by prudential standards or their own risk models. But doing so they may cause liquidity strains and increase volatility in bond prices which, in turn, affects the transmission of monetary policy. To be clear, CCPs should of course make sure they remain resilient to liquidity risks. But they should do so in a predictable manner and based on sound risk models that should not undercut monetary policy decisions.

Yves Mersch: ECB Clearing – the open race, full press release (HTML)