FBF online debate discusses SME bank loans and equity-based instruments to support recovery
The wide-spread lockdowns that followed the outbreak of COVID-19 are having a substantial impact on real economies and in particular on Small and Medium-Sized Enterprises (SMEs) which struggle to bridge their profit shorfalls.
This online debate followed our last joint online debate on ‘Europe’s Banking System: Fast Forward Six Months‘ in which a number of crucial themes emerged – such as the need for a European Pandemic fund, continued SME lending and debt sustainability – as being core to the recovery.
The event was chaired and moderated by Elena Carletti (Bocconi University and EUI), who recently contributed to the debate together with Arnoud Boot (University of Amsterdam), Rainer Haselmann (Goethe University Frankfurt), Hans-Helmut Kotz (Harvard Center for European Studies and SAFE), Jan Pieter Krahnen (SAFE), Loriana Pelizzon (Goethe University Frankfurt, SAFE, Ca’ Foscari University of Venice), Stephen Schaefer (London Business School), Marti Subrahmanyam (NYU Stern Business School)
Further information on the European Pandemic Equity Fund may be found in:
“Corona and Financial Stability 4.0: Implementing a European Pandemic Equity Fund”SAFE Policy Letter 84
More generally, we recommend the reading of recent policy letters written by our colleagues from SAFE (Frankfurt).
The Coronavirus and Financial Stability – SAFE Policy Letter 78
The spreading of the Covid-19 virus causes a reduction in economic activity worldwide and may lead to new risks to financial stability. The authors draw attention to the urgency of the targeted mitigation strategies on the European level and suggest taking coordinated action on the fiscal side to provide liquidity to affected firms in the corporate sector. Otherwise, virus-related cashflow interruptions could lead to a new full-blown banking crisis. Monetary policy measures are unlikely to mitigate cash liquidity shortages at the level of individual firms. Coordinated action at European level is decisive to prevent markets from losing confidence in the resilience of banks, particularly in countries with limited fiscal capacity. In contrast to the euro crisis of 2011, the cause of the current crisis does not lie in the financial markets; therefore, the risk of moral hazard for banks or states is low.
Corona and Financial Stability 2.0: Act jointly now, but also think about tomorrow – SAFE Policy Letter 79
In this SAFE Policy letter on the implications of the Coronavirus for financial stability in Europe, we address how to mitigate a systemic financial crisis that is propagating in slow motion, as we speak, and which we identified and diagnosed in the SAFE policy letter 782. This second letter emphasizes the speed at which the underlying unprecedented real sector cash drains and how asymmetric national solutions may be destabilizing in the longer run.
Corona and Financial Stability 3.0: Try equity – risk sharing for companies, large and small – Read SAFE Policy Letter 81
This policy letter adds to the current discussion on how to design a program of government assistance for firms hurt by the Coronavirus crisis. While not pretending to provide a cure-all proposal, the advocated scheme could help to bring funding to firms, even small firms, quickly, without increasing their leverage and default risk. The plan combines outright cash transfers to firms with a temporary, elevated corporate profit tax at the firm level as a form of conditional payback. The implied equity-like payment structure has positive risk-sharing features for firms, without impinging on ownership structures. The proposal has to be implemented at the pan-European level to strengthen Euro area resilience.