SMB Loans Pose Potential Big Risk For European Banks

Euro area banks have cut back on lending, as the pandemic continues to threaten the economy. At the same time, however, big problems are building over their earlier loans to small and medium-sized businesses (SMBs).

The Wall Street Journal reports that many SMBs across Europe are fighting for survival. The region’s banks have 2 trillion euros out on loan to small businesses — two-fifths of what is on their business loan books.

Compounding the problem are low interest rates.

The WSJ said that regulators fear a new wave of SMB defaults could mean big losses for European banks. That could put some banks in the category of needing a government bailout of some sort to survive.

Andrea Enria, the head of banking supervision at the European Central Bank, has warned of what lies ahead if the economy gets hammered all over again. He said that bad loans could actually amount to 1.4 trillion euros, which is more than during the Great Recession.

Elke König, chair of the new European Banking Union resolution authority, warns that banks have to figure out which loans are more likely to be viable. And they have to prepare for an onslaught of bad loans due to possible further COVID-19 lockdowns.

The WSJ said Europe’s banks are especially vulnerable to small businesses going belly up, compared to the United States. Companies with fewer than 250 workers employ two-thirds of all private-sector jobs in the European Union.

In addition, small businesses in the U.S. tend to be bigger, on average. About half of Europe’s workforce is employed by companies that employ fewer than 50 people. In comparison, only about a quarter of U.S. workers are employed by companies that small.

This pushes European businesses to taking out bank loans. That’s because, the smaller businesses are not attracting investors. In Europe, about 80 percent of small business financing comes from banks, compared with only half of such financing in the U.S.