In Europe, banks are the primary source of financing for non-financial companies. In the euro zone, about 80% of corporate financing is still provided by bank loans, with the remaining 20% provided by capital markets using bonds. This 80/20 split is the exact opposite in the US, where markets provide the majority of corporate financing.
However, in the wake of the subprime crisis and the development of the regulatory environment, the European banking system is at the heart of a structural shift away from financing by banks. This is “disintermediation”. It can take different forms, from traditional bond issuance to direct lending to companies by non-bank investors such as insurers and pension funds. Investors are increasingly interested in long-term financing in areas such as infrastructure projects, commercial real estate, export finance, aircraft and shipping. They can either co-lend with banks, or buy “project” bonds or other kinds of asset-backed bonds, for which a market is gradually developing in Europe. A standardised market already exists for some assets – for example commercial real estate – but for others, such as roads and aircraft, it has yet to develop in Europe.
The disintermediation process is already well engaged in Europe. Investors’ involvement in financing should bring Europe closer to the US model, with financing more equally balanced between banks and institutional investors. However, banks retain a critical role in the new system: in most cases, they will keep a portion of the financing, guaranteeing that their interests are aligned with those of investors and thus preventing the excesses of the total disintermediation models at the origin of the US subprime crisis. Banks will also continue to provide structuring and servicing functions, which require typical banking know-how and have high barriers to entry.
The disintermediation movement is thus a win-win development for the European market, enabling it to adapt to the new regulation and financial paradigm and continue to finance the real economy and economic growth, while combining banks’ historical asset/lending expertise with investors’ long-term funding capacity.