Banks are the main source of financing for businesses in Europe. They represent more than 70% of the financing received. Although this percentage is much higher in the case of small businesses, something that does not occur in other countries such as the United States or the United Kingdom, where there is greater dependence on market financing. Diversification in financing sources is always desirable, but in times of instability and illiquidity in financial markets, it is bank financing that assumes—in coordination with the authorities—the responsibility of maintaining financing for spending and investment in the economy. That is why it is essential to have a healthy and resilient banking sector, so that it can always fulfill its role of providing credit to the private sector, especially in difficult situations.
The bank financing channel, which is highly regulated and supervised, transmits central banks’ monetary policy to households and businesses. The authorities set official interest rates and inject or withdraw liquidity to achieve their stability objectives through banks.
Companies may require external financing to invest in a new line of business, increase current production, cope with difficult periods, or access day-to-day liquidity. Securing financing is not among their main concerns, as reflected in the Business Activity Survey (EBAE) prepared by the Bank of Spain for the second quarter. Companies are now far more concerned about how difficult it is to find suitable labour and about inflationary pressures than about accessing financing from financial institutions.
One indicator that central banks monitor to detect imbalances in corporate financing is the gap between credit and GDP. Excessive credit can lead to a response from the authorities to safeguard financial stability. The problem arises when the source of excess financing comes from financial markets, amid overly loose financial conditions that monetary authorities have maintained for too long. This has been precisely one of the main vulnerabilities to financial stability, as global authorities have acknowledged in recent years.
In Spain, the credit-to-GDP gap has experienced sharp recent fluctuations due to instability in GDP itself, while financing was ensured during the worst of the pandemic through support measures by financial institutions. The strong expansion of bank credit in 2020 was key to protecting the productive fabric and is the best example of the effectiveness of public-private collaboration. At present, the credit-to-GDP ratio remains at elevated levels, not so much as a sign of excess financing but rather due to the lag in the Spanish economy’s recovery to pre-pandemic output levels. Additional indicators such as the level of debt of companies and households, their debt-service ratio, and the pace of credit origination are at moderate levels.
The interest rate increases already signalled by the European Central Bank will likely affect credit demand. But fighting inflation has become a priority for everyone. The inflation rate, already in double digits—something unthinkable until recently—makes us poorer in the short term, especially those most disadvantaged, and clouds our future.
The CEPYME indicator published in May reflected growing concern among companies about the consequences of the war in Ukraine, rising inflation, and increased uncertainty. “Greater bank lending and keeping interest rates at very low levels provide significant support to SMEs’ financial situation. Even so, SMEs are not in a position of strength: profitability is lower than in the 2017–2020 period and total indebtedness remains too high to ensure solvency, despite the enormous deleveraging effort of recent years.”
All signs point to a decline in demand for financing in the coming months. Spanish banks have the strength and resources to ensure the financing companies need to move forward and bring their projects to fruition in any situation, including in challenging times such as the present.
José Luis Martínez Campuzano, spokesperson for the Spanish Banking Association
