What was the big drama of 2020? Certainly the threat of overloading our health system and the economic and social consequences of the Corona crisis. But parallel to this, a drama is taking place in our financial system, quieter and more insidious than the first, but of enormous explosiveness for our society. In March the financial system was on the verge of collapse: the financing conditions for numerous companies and many countries were so poor that they could not take out the loans they urgently needed to overcome the crisis. The central banks intervened with rescue programs that even eclipsed the 2008 measures. For example, the ECB’s total assets grew by EUR 813 billion between 2007 and 2010 during the financial crisis, but this year between February and December alone by EUR 2,261 billion. The financial system stabilized quickly and lending to large corporations increased significantly. But what about the small and medium-sized companies that shape the image of our society? It could be much harder for them to get credit. As a result, you risk being systematically disadvantaged compared to large companies, including the risk of a wave of takeovers. The reason is not the lack of will of the central bankers, but the structure of our financial system.
Do you already know ours Newsletter “The Week”? In your mailbox every Friday – if you want. Here you can sign up
Where does the unequal treatment of companies by the financial system come from? A small or medium-sized company typically receives its loans from its house bank. This route is also open to larger companies, but they still have a second option, namely to sell corporate bonds directly on the capital market. In March, both sources threatened to run dry: loans will not be granted unless it is clear that the companies will still exist tomorrow to repay them. Bankers see it that way, and so do corporate bond buyers on the capital market, such as pension funds or life insurers.
The central banks are rushing to help
This is why the central banks intervened massively in March to stimulate lending, for example through bond purchase programs and easier refinancing conditions for banks. The bond purchases work because the central banks buy corporate bonds on the secondary market, thereby relieving a pension fund of the concern that it will be left with poorly performing bonds. Of course, with this outlook it is much easier for the pension fund to buy bonds from companies. Not so with a bank, because it cannot simply sell the loans it grants on the capital market: bank loans are much more illiquid. Instead, the European Central Bank offers banks themselves cheap loans in the hope of increasing banks’ willingness to lend. But that doesn’t work so far.
The data show that, as a result of the central bank intervention, the risk in the capital markets fell back to pre-crisis levels and lending increased significantly. Large, capital market-based companies can therefore issue bonds cheaply and use them to raise capital. For example, the net sales of corporate bonds in Germany from January to October 2020 are already 145% above the value for the whole of 2019. Measured in terms of gross sales, the total activity of the market for corporate bonds has even increased by 180 percent, see Figure 1.
The volume of newly granted bank loans to companies in the real economy, on the other hand, has stagnated since May 2020. And this even though the European Central Bank, as part of its long-term refinancing program (TLTRO), even goes so far as to give banks money for loans by reducing the lending rate to -1 Percent sets. There is only one condition: the banks must issue the same amount of credit as in the previous year. They do that too, but lending is stagnating at the previous year’s level, while lending needs are increasing. In addition, banks are tightening the conditions for lending, as a survey by the Bundesbank shows. This is particularly evident in the widening of the premiums for riskier loans.