SME lending is focus of ECB meeting

The focus of tomorrow’s ECB meeting will be whether the bank unveils a “big bazooka” to boost SME lending across the region.

Last month, the ECB cut the official interest rate from 0.75% to a historically low 0.5%. It is unlikely that there will be any further interest rate cuts for the remainder of this year.

But ECB president Mario Draghi has noted on a number of occasions that credit transmission throughout the eurozone remains fragmented.

Take Ireland, for example. Only people on tracker mortgages will benefit from the reduction in the interest rate. Irish banks are still in the process of deleveraging, which means they are shrinking their loan books and increasing their deposit bases.

Irish banks are also trying to repair their balance sheets by increasing the interest rates on their lending products.

Indeed, most banks across the eurozone are also in the process of deleveraging. In this environment, lending levels, particularly to the SME sector, are well below the trend rate.

SMEs generate by far the highest amount of employment and economic activity in the eurozone. There will not be a durable recovery until this sector returns to health.

The ECB has been looking at ways of boosting lending. Over recent months it has been in talks with the European Investment Bank (EIB) about developing a securitisation model for SMEs.

The idea is that the EIB would be instrumental in setting up a securitisation model by pooling together SMEs loans and creating a liquid market for these assets.

Banks would be able to use these asset-backed securities as collateral with the ECB in return for liquidity, which would encourage them to lend to SMEs.

Chief european strategist with the US hedge fund, Trend Macro, Lorcan Roche Kelly, says that it is unlikely that the ECB will announce a big bazooka tomorrow.

Instead, it is likely to outline how it plans to get a securitisation market up and running over the next six-to-12 months.

Mr Draghi is also expected to discuss plans for EU banking union at tomorrow’s meeting. There are differences opening up between the commission and Berlin over how the system should work.

The commission wants an EU single resolution regime and fund with the power to close down banks.

However, German chancellor, Angela Merkel, wants responsibility for the resolution of banks to stay within the remit of national governments.