fpmi calls upon the German government to undertake further measures to combat the credit crunch
03. Mar 2010, Munich Financial Centre Initiative
Economic upswings produce a strong demand for corporate financing. fpmi (Munich Financial Center Initiative) foresees the meeting of this demand requiring the undertaking of further supportive measures by Germany’s federal government. A failure to do such would primarily and negatively affect SMEs (small and medium-sized enterprises). The measures launched last year by the government served to lessen the impact of the financial crisis upon flows of corporate financing. fpmi is calling for their being set forth and expanded this year. The Initiative’s proposals: extend the term of Germany’s Economic Funds (Wirtschaftsfonds Deutschland) while simplifying its operating structures, and while taking steps to revive the securitization markets.
fpmi has identified several causes of the peril of a credit crunch. Prime among them: the lowering of corporate credit ratings resulting from declines in profitability registered in 2009. Other causes are the stiffening of the capital requirements placed upon banks supplying loans to their customers and the often accompanying decline in such backing ensuing from the financial crisis.
To deal with these problems, fpmi has drawn up a wide-ranging package of proposals. These include extending the term of Germany’s Economic Funds to 2011. To establish the preconditions requisite to achieve this, the German government should immediately initiate negotiations with the EU. Another proposal foresees the improving and simplifying of the conditions governing the dispensing of funds administered by the Kreditanstalt für Wiederaufbau (KfW—Germany’s public sector development bank). The Economic Funds are to furnish €40 billion of credit. Of that, more than €16 billion has been applied for, and only €5.7 billion approved.
An augmentation of the support ensuing from the funds would result from a simplification of the requirements placed by KfW on the applications for loans submitted by banks, and from a more expeditious processing of these applications. A way for KfW to enhance the attractiveness of the general-purpose loans provided by it and channeled via applicants’ main banks would be for it to assume part of the accompanying risk. This, in turn, would increase the capital backing and thus the amount of credit capable of being supplied by these banks. fpmi is also proposing KfW’s applying of less stricter standards when assessing the likelihood of a loan’s becoming delinquent. Doing such, in turn, would provide basically viable companies, which are thus those with good prospects, with access to this special-purpose program.
Reviving the securitization markets
In fpmi’s opinion, a third way to avoid a credit crunch is get securitization markets back on their feet. Prior to the crisis, these markets had been an importance source of the liquidity and refinancing availed upon and required by banks and by investors managing portfolios. Since the outbreak of the financial crisis and the accompanying loss of confidence in them, these instrumentalities haven’t been available. fpmi views the bringing about of a revival of securitization markets as being highly important, as doing such would provide a measure of relief from capital adequacy ratios. That, in turn, would increase the amount of credit capable of being supplied by the banks. Another positive ramification would be the broadening of this provision to once more encompass large-sized companies.
Incontrovertible is the fact that this revival has to be accompanied by the instituting of measures assuring a high quality of product. This constitutes the only way of restoring confidence in securitization markets. A prime thrust of these measures is increasing the products’ transparency. To achieve this, fpmi is calling for an improvement of the legal parameters governing securitization. One idea to be looked at it would be KfW’s purchasing or guaranteeing on a limited-term basis a portion of the securitized risks involving SMEs (with a remainder of such risks resting with the original provider of the loan). Doing such would quickly get the market back on its feet.
Mezzanine financing used to constitute an alternative to loan-backed instruments. This is scarcely the case nowadays. A large number of mezzanine tranches will expire in 2011 and beyond. A solution has to be found to the problem of follow-up financing. KfW has offered to replace expiring mezzanines with loans available from current special programs. fpmi doesn’t view this approach as being the right one, as it ignores the fact that a company’s creditworthiness is dependent upon its having equity which is capable of being comprised in such dedicated calculations.
Extend depreciations carried in balance sheets
fpmi has identified another promising way to preclude SMEs’ which undertook large-scale investments during the past few years from suffering a lack of credit: to extend the term of depreciations carried in balance sheets. Doing such would improve the key balance sheet indicators of what are generally very viable companies. That, in turn, would help augment the inflow of credit to the companies. To be effective, such measures have to, however, include those precluding negative ramifications upon balance sheets drawn up for tax purposes.
fpmi has identified several causes of the peril of a credit crunch. Prime among them: the lowering of corporate credit ratings resulting from declines in profitability registered in 2009. Other causes are the stiffening of the capital requirements placed upon banks supplying loans to their customers and the often accompanying decline in such backing ensuing from the financial crisis.
To deal with these problems, fpmi has drawn up a wide-ranging package of proposals. These include extending the term of Germany’s Economic Funds to 2011. To establish the preconditions requisite to achieve this, the German government should immediately initiate negotiations with the EU. Another proposal foresees the improving and simplifying of the conditions governing the dispensing of funds administered by the Kreditanstalt für Wiederaufbau (KfW—Germany’s public sector development bank). The Economic Funds are to furnish €40 billion of credit. Of that, more than €16 billion has been applied for, and only €5.7 billion approved.
An augmentation of the support ensuing from the funds would result from a simplification of the requirements placed by KfW on the applications for loans submitted by banks, and from a more expeditious processing of these applications. A way for KfW to enhance the attractiveness of the general-purpose loans provided by it and channeled via applicants’ main banks would be for it to assume part of the accompanying risk. This, in turn, would increase the capital backing and thus the amount of credit capable of being supplied by these banks. fpmi is also proposing KfW’s applying of less stricter standards when assessing the likelihood of a loan’s becoming delinquent. Doing such, in turn, would provide basically viable companies, which are thus those with good prospects, with access to this special-purpose program.
Reviving the securitization markets
In fpmi’s opinion, a third way to avoid a credit crunch is get securitization markets back on their feet. Prior to the crisis, these markets had been an importance source of the liquidity and refinancing availed upon and required by banks and by investors managing portfolios. Since the outbreak of the financial crisis and the accompanying loss of confidence in them, these instrumentalities haven’t been available. fpmi views the bringing about of a revival of securitization markets as being highly important, as doing such would provide a measure of relief from capital adequacy ratios. That, in turn, would increase the amount of credit capable of being supplied by the banks. Another positive ramification would be the broadening of this provision to once more encompass large-sized companies.
Incontrovertible is the fact that this revival has to be accompanied by the instituting of measures assuring a high quality of product. This constitutes the only way of restoring confidence in securitization markets. A prime thrust of these measures is increasing the products’ transparency. To achieve this, fpmi is calling for an improvement of the legal parameters governing securitization. One idea to be looked at it would be KfW’s purchasing or guaranteeing on a limited-term basis a portion of the securitized risks involving SMEs (with a remainder of such risks resting with the original provider of the loan). Doing such would quickly get the market back on its feet.
Mezzanine financing used to constitute an alternative to loan-backed instruments. This is scarcely the case nowadays. A large number of mezzanine tranches will expire in 2011 and beyond. A solution has to be found to the problem of follow-up financing. KfW has offered to replace expiring mezzanines with loans available from current special programs. fpmi doesn’t view this approach as being the right one, as it ignores the fact that a company’s creditworthiness is dependent upon its having equity which is capable of being comprised in such dedicated calculations.
Extend depreciations carried in balance sheets
fpmi has identified another promising way to preclude SMEs’ which undertook large-scale investments during the past few years from suffering a lack of credit: to extend the term of depreciations carried in balance sheets. Doing such would improve the key balance sheet indicators of what are generally very viable companies. That, in turn, would help augment the inflow of credit to the companies. To be effective, such measures have to, however, include those precluding negative ramifications upon balance sheets drawn up for tax purposes.