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Corporate Financing: Exploring New Opportunities While Safeguarding Proven Methods
With the end of the low-interest phase, corporate financing costs have risen significantly.
The rise in corporate financing costs underscores the importance of innovation, sustainability, and digitalization investments.
Simultaneously, the necessity for companies to invest in innovation, sustainability, and digitalization increases. Against this backdrop, financial system structures and regulations should be designed to provide financing for investments on fair terms.
The Capital Markets Union in Europe can open up new possibilities. At the same time, the conditions for the most important source of financing for German companies—bank loans—are being continuously worsened by regulations. Therefore, a balance must be found between stronger capital market orientation and maintaining the framework conditions for bank loans, as well as between stable financing frameworks and better financing conditions for investments.
The strength of the local economy lies in the diversity of its companies—from large corporations to typical SMEs and micro-enterprises. All these companies rely on an investment-friendly environment when it comes to financing. This should also include exploring new technical possibilities and reducing administrative barriers.
The following guidelines should inform economic policy-making
The regulation since the 2008 financial crisis has significantly increased financial stability in Europe. This stability is an essential prerequisite for economic development. At the same time, the Basel-III finalisation, "Basel IV" and other initiatives make financing more difficult. This especially affects SME financing and the financing of small companies, as lending becomes more expensive for credit institutions, thereby increasing interest costs for commercial customers. Financing certain activities, such as start-ups, also becomes increasingly difficult under these conditions, pushing some financing towards less regulated shadow banks. This evolution should be adjusted to better suit the needs of the industrial economy. The impact of regulatory requirements on corporate financing should be continuously evaluated and, during economic downturns, adapted countercyclically. Adjustments should also consider necessary investments and the financing scopes of companies. To improve financing conditions for SMEs, guarantee banks, as subsidiary self-help organisations of the economy, should be further developed and strengthened. Development banks, which increase planning certainty for businesses and limit bureaucratic effort, also play a key role in corporate financing.
The extent of financial market regulation should better reflect the complexity and risks of business activities (known as the "proportionality principle"). Regional banks do not require the same complex regulations as internationally operating institutions. Overly complex regulations risk the long-term provision of investments and working capital, particularly for small and medium-sized businesses. Thus, financial market oversight should more strongly consider the size and orientation of institutions. Similarly, rules for disclosing financial and non-financial metrics for real-economy businesses should account for company size and relevance, focusing strictly on risk-related aspects.
A Europe-wide 'Savings and Investment Union' could make bank and capital market financing more accessible and support businesses in Germany.
The complexity of administrative demands in financing is soaring. Solutions focus on targeted regulations and technological simplifications.
The new and diverse capabilities of digital financial services can create new opportunities for businesses. In particular, distributed ledger technology – also known as blockchain – and other innovative technologies offer many possibilities, but have struggled to find wide adoption. The European Central Bank, in collaboration with the private sector, should use the introduction of a digital euro to drive innovation and new business models with this technology. Initially, it should focus on the wholesale version and the B2B version, leveraging the technical opportunities and strengthening Europe's position in international competition, rather than introducing the retail version, which could potentially limit the intermediation capabilities of commercial banks.
