1. SMEs in Ireland: Contributions, Credit and Economic Crisis
Fergal McCann
Irish Economy Conference, Dublin 1st February
Disclaimer: The views expressed here do not represent the official opinions of the Central Bank or Ireland or the ESCB

2. Domestic demand and particularly investment have fallen severely and are just showing signs of stabilising. (Source: CSO Quarterly National Accounts)

3. 2: SMEs in the real economy and the distribution of economic activity

4. The distribution of private sector employment (Source: CSO - CIP and ASI; Excludes Agriculture and Construction)
SMEs are very important in private sector employment (72%)
Domestic demand is crucial for employment (64%)

5. Different picture for Gross Value Added – the international sector is much more important. (Source: CSO - CIP and ASI; Excludes Agriculture and Construction)
SMEs account for 52% of GVA
Domestic demand accounts for 33%

6. Exports and employment are not strongly related – “export-led recovery” as employment recovery???

7. 3: SMES and the banking crisis

8. Direction of SME new lending – to which sectors is new lending going
Direction of SME new lending – to which sectors is new lending going? 4-quarter average figures to Q Key message – SME lending is realigning away from Real Estate lending (although share of stock of credit remains large at ~50%

9. Non-financial, non-Real Estate Lending
Non-financial, non-Real Estate Lending. Key “winners” – Primary; Bus-Admin Services, Other Community, Social. Key “Losers” – Wholesale/Retail; Hotels & Restaurants

10. NB: “losing” sectors employ large amounts of people:
Construction 98k
Wholesale & Retail (including Motors) 330k
Hotels & Restaurants 145k

11. SME Gross New Lending is not growing since 2010 (Source: Central Bank; Money, Credit and Banking Statistics)

12. Given economic contraction, some correction to credit conditions was necessary and inevitable. Has the pendulum swung too far? Credit decisions, 2007 and 2010, Eurostat Access to Finance

13. The price of credit for SMEs – impact of deposit competition (in reaction to sharp fall in external funding) on lending spreads for SMEs?
Covered banks offer higher deposits from 2010 onwards 
Increased spreads for small firm loans are driven by covered banks over same period.

14. 4: Sources of the fall-off in credit provision

15. Supply and demand side factors are both at play in Ireland
Banks’ balance sheet problems
High losses on non-performing loans and a need for more sustainable assets to liabilities ratio can lead to credit rationing.
Changes in risk aversion post-crisis.
Borrowers’ balance sheet problems
High arrears, excessive debt levels and decreased creditworthiness can lead to loan rejection.
Demand
Excessive existing leverage – incentive is to lower borrowings, not accumulate more debt.
Lack of aggregate demand for their output.
Decreased investment and growth opportunities.
Similar to Stiglitz and Weiss (1981) we mean credit rationing as the excess demand for loanable funds
which is not satisfied as “banks deny loans to borrowers who are observationally indistinguishable from those
who receive loans.”

16. Balance Sheet Recession? (Source: Macro Financial Review, Central Bank)
NB: MNCs account for large share of these numbers.
Disaggregate data unavailable for SMEs or indigenous firms.
Cussen and O’Leary (2012) highlight that 47% of GVA of Irish NFCs is from foreign firms.
as a % of financial assets, Irish NFC debt is one of the lowest in Europe (under 50%).
Almost 50% of NFC debt in Ireland is with non-resident lenders. MNC debt.

17. While Euro area NFCs appear in balance

18. Demand: Net % increase in need for external finance is falling; but remains around euro area average Data: SAFE Survey up to wave 7 (Sept 2012)

19. Sources of weak demand: investment demand is low, but is offset by above-average demand for working capital. Unknown: how much smaller are lending volumes for Working Capital?

20. Pattern reflected in Red C survey Mar-Sept 2012
Pattern reflected in Red C survey Mar-Sept “Reasons for making financial request”

21. A balance-sheet explanation for decreased lending: Negative relationship between new lending and 90-day arrears rate in a sector (Source Central Bank of Ireland lending data).

22. Expected bank rejections – Across euro area, the risk-adjusted coefficient on bank rejection responds to the macro economy…
Stronger Domestic Demand Lower Pr(Rejection)
More indebted private sector  Higher Pr(Rejection)

23. Competition among banks is decreasing since 2010 – potentially negative implications for price and access to credit for SME

24. Credit Rejection (% of applicants) – Mazars/Red C reports improving rejection rates. Still unfavourable in terms of European ranking. Data: SAFE survey, up to Wave 7 (Sept 2012)

25. Changes in Other Terms and Conditions – Ireland and other peripheral countries still have most unfavourable patterns.

26. Summary
The Irish economy is experiencing the aftermath of a credit-induced property boom.
Banks suffering losses and need to shrink balance sheets. Bank competition decreasing.
Firms over-leveraged; aggregate demand weak; zero fiscal space.
The credit market is exhibiting the symptoms of this stress:
Sectors with higher loan arrears are receiving less new lending.
Countries in Europe with weaker demand or higher leverage have higher probability that SMEs are rejected for credit.
The demand for financing does not appear below-average in Ireland. Demand for investment financing is certainly weak in Ireland. Still not enough information on volumes.
There is evidence that Irish SMEs are experiencing credit constraints, beyond that predicted by the weak economy here, in
Positives:
Credit constraints appear to have reached their most severe in 2011.
Property prices, GDP and GNP stabilising
Govt. measures; NPRF €850M investment – fill funding gaps for firms, free up bank capital.

27. References to sources for this talk.
Central Bank of Ireland. Economic Letter - Vol 2012, No. 8 Irish SME credit supply and demand: comparisons across surveys and countries - Sarah Holton and Fergal McCann
Central Bank of Ireland. Economic Letter - Vol 2012, No. 4 Bank competition through the credit cycle: implications for SME financing - Fergal McCann and Tara McIndoe-Calder
Central Bank of Ireland. Research Technical Paper 04RT12 Firm Credit in Europe: A Tale of Three Crises by Sarah Holton, Martina Lawless and Fergal McCann.
Bank balance sheet repair and credit provision: Insights from the Irish bank deleveraging experience. Jane Kelly, Reamonn Lydon, Martin O'Brien, Fergal McCann. Mimeo, Central Bank of Ireland.
Credit Access for Small and Medium Firms: Survey Evidence for Ireland by Martina Lawless and Fergal McCann. Forthcoming Journal of SSISI