• European SMEs rely heavily on bank financing. Bank loans make up around 70% of external financing - much more than in the US where bank loans constitute around 40% of external funding.
  • Being dependent on bank financing makes SMEs vulnerable to restrictions on lending, which could arise due to regulatory changes.
  • The finalization of Basel III and the implementation of Basel IV will make banks less willing to lend to SMEs and increase the funding costs.
  • We estimate that funding costs may increase by more than 100 basis points for companies with low credit quality.
  • The EU Capital Market Union aims to make it easier for SMEs to tab alternative sources of funding and reduce their overreliance on bank financing.
  • Alternative financing, such as direct lending, is becoming increasingly important for European SMEs. We assume that SMEs will rely more and more on non-banks and less on banks.