A New Mediobanca for Small and Medium-sized Enterprises

Commentary: We officially propose the establishment of a medium-long term credit bank dedicated to small and medium-sized enterprises. You can have access to it with the same criteria as an ordinary industrial credit bank, which can lead the most promising SMEs to be listed on the stock exchange or can possibly organize an effective market for the minibonds issued by any small and medium-sized enterprise

 

Photo: Reuters

Mediobanca was established by Mattioli and Cuccia in 1946, immediately as a joint stock company, and its full name was Mediobanca Banca di Credito Finanziario. It operated from the beginning having, as founding partners, Banca Commerciale, of which Raffaele Mattioli was President at the time, and Credito Italiano.

Enrico Cuccia was an unsurpassed analyser of balance sheets and accounts - in fact, one of his best known witty remarks was the one on Berlusconi's Fininvest: "Indeed, how much is a TV antenna really worth?" He was General Manager of Mediobanca from its foundation until 1982, when the dual crisis of public and private companies and of the banks that supported them could already be perceived.

What was the logic behind the establishment of this particular financial structure?

Simply to guarantee and meet - in the medium and sometimes long and very long term -  the economic needs of the manufacturing companies, which had been devastated by World War II.

After the banking reform of 1936, of which Mattioli and Cuccia’s fatherin-law, Alberto Beneduce, had designed the general guidelines - later imitated in many financial laws following the 1929 crisis, also in the USA - there were many banks that had chosen to operate in the traditional market of savings collection and then in the short-term credit market.

There was, therefore, the lack of a specialized financial structure which worked only for companies, funded them in the medium-long term and finally led them - where possible - to be listed on the Stock Exchange.

At the time, legislation clearly separated credit and savings banks from those that operated for companies and led them to the listed on the Stock Exchange.

It was the most rational way to separate companies from banks, so as to avoid companies’ crisis leading to the death of public savings.

Enrico Cuccia, who certainly did not like the Italian ruling class, except for his friend and old banker Ugo La Malfa, kept Mediobanca clearly out of the many pressures coming from the whole political world.

However, particularly from 1982 onwards, Cuccia had to face very strong tension with the Institute for Industrial Reconstruction (IRI) - at the time led by Romano Prodi - that forced the three banks of national interest, namely Banca Commerciale, Banca di Roma and Credito Italiano - which were all within the IRI sphere - not to renew Enrico Cuccia’s term of office.

Nevertheless, there was another factor that led to the inevitable transformation of Mediobanca

The 1993 Banking Law, in fact, abolished the obligation for banks to be specialised - hence the separation between savings banks and financial credit institutions for medium-long term companies - and a real crisis occurred between the banks participating in the shareholding structure of Mediobanca and the old medium-long term credit institution.

The central idea underlying the 1936 Law, however, was not entirely wrong, even though it was no longer comprehensible in the context of financial globalization.

Either the banks are separated from their clients or the likelihood of a parallel collapse increases disproportionately.

Moreover, the Consolidated Law of the then Prime Minister Giuliano Amato, i.e. the 1993 reform law, put an end to the structural division between banks and anticipated by six years the end of the U.S. GlassSteagall Act which, in essence, resumed the principles of separation between banks and companies enshrined in the Fascist Banking Law of 1936.

Currently, in Italy alone, 200 billion euros are needed within the next 18 months in view of resuming the path of development and even of mere productive stability, apart from the E.U. governments’ initiatives - albeit necessary - to face the impact of the Covid-19 pandemic.

This is the extent of a complete post-war reconstruction. With a view to solving these specific problems, the States have always resorted to forms of extraordinary debt - as was the case with the traditional War Bonds - which are bearer financial instruments with a lower average income than the standard ones, but have a long duration ranging between 7 and 15 years.

Nowadays, however, the securities market is very complex and structured, but we could also envisage a monthly issue of 15-20 year Italy Bonds - a market that is already very large and currently appreciated by savers - with a 1.5-2% constant coupon, the same as the current BTPs, obviously exempt from all present and future taxes, but with a tax credit -  if anything-  for corporate or retail customers equal to or even higher than the coupon (for example a 3-4% tax credit).

The SMEs’ crisis, however, has been worsened by the COVID-19 pandemic and the necessary lockdown of many companies and craft businesses.

Just think that the Italian small and medium-sized enterprises account for over 90% of the total number of companies -  and I am referring to those with less than 20 employees - but receive only 13% of bank loans.

In 2019 there was the biggest drop in loans to SMEs as from 2015.

If we look at the Bank of Italy data processed in early 2020, it turns out that credit to riskier SMEs - calculated on the basis of CERVED criteria - has fallen by 8% for micro-enterprises, but the rating and the amount of bank loans available also for the "safest" SMEs have decreased.

In the meantime, bank loans have increased throughout the Eurozone by 3.7% in continental Europe - hence also in Italy, although only by 3% - with a rate of five percentage points lower in Italy than the trend currently recorded in the rest of the European Union.

A credit crunch for the Italian smaller companies, which makes them very weak, often unable of achieving good globalization, and also inevitably slow in renewing their cutting-edge technologies, but finally prone to the cycle of their short term and loan capital.

One of the reasons for this structural weakness of the Italian SMEs’ finance is, on the one hand, the fact that they have no access to the debt market, with the issuing of bonds or mini-bonds, but, on the other hand, the real European regulatory jungle, which is aimed at reaching one single goal, i.e. to severely lower the credit risk for banks.

All E.U. regulations in the banking sector tend not to grant credit at all to the weaker and smaller SMEs and to consider the usual non-performing loans of companies only as an immediate prelude to bankruptcy.

If we had behaved like this during the huge economic boom of the 1960s, we would still have the rubble of World War II in our major cities.

If a bank follows the completely risk-averse behaviour of a traditional insurance company, then it might as well change business.

Furthermore, the new E.U. regulations in the offing, regarding the regular provision of bank loans to companies and households, are even stricter and more stringent than the international ones - hence money is lent only to those who basically do not need it.

Not to mention the regulations known as Basel II, i.e. the International Convergence of Capital Measurements and Capital Standards developed by the "Basel Committee" established within the Bank for International Settlements (BIS), located in the big tower overlooking the centre of the Swiss city.

Ironically, the BIS was created in 1930 to manage the implementation of the Young Plan, the ingenious and very modern financial operation that cut the war debt of defeated Germany by 20%, dividing it into instalments to be paid every 58 years, with the last one paid in 1988, one year before German reunification.

Unlike this brilliant idea of debt repayment, which was developed in the 1920s, the Basel II regulations, which came into force in 2007, have only one obsessive goal, i.e. to make the banking system stable and radically reduce the companies’ credit risk vis-à-vis the system itself.

In some years after the Basel II regulations, the reduction in loans to companies, and in this case also to large companies, was even 3.5% on average.

It should also be recalled that the Basel III regulations have been in action since January 2013, becoming fully operational in January 2019.

According to the latest data from the Bank of Italy, the decrease in loans to SMEs ranges between 1.9 and 2%.

The estimate is made on the basis of already largely insufficient data.

Furthermore, the weight of bank loans on Italian corporate balance sheets, both of SMEs and large companies is, on average, over 60% of total debt.

In Germany, the United Kingdom and France the bank debt burden on total corporate debt is around 50%.

Hence, if the companies themselves do not take risks on their own and tend to be not only risk averse but also focused on unproductive income, also the banks tend to protect themselves more than usual and even more than it happens with the Basel III regulations.

Hence companies’ low capitalization, but also naive, excessive and bureaucratic formalism of banks, which often forget that their business is to sell money and, when giving information, put together national,  European and international standards that, in addition to Basel III regulations, also include the IRFS 9, created in 2014 to improve and standardize financial information.

Finally, the Italian SMEs pay much more for loans than their competitors because the risk analysis procedure is much more formalized, legalized, bureaucratic and very strict, while the German and French banks serve their business clients in a much more flexible way.

The guarantees are almost always the applicant’s personal ones. This is not even provided for in the various Basel regulations. The rates of access to credit in other European countries are 2-3%, with Italy that, for a low rating company, even goes so far as to charge a 7-8% yearly interest rate.

It should be recalled that currently 92% of Italian companies are microenterprises and SMEs, with five and a half million VAT numbers. The average turnover of all these micro-enterprises and SMEs does not exceed two million euros per year.

In France, Germany and Great Britain, the number of entrepreneurs is half of the Italian ones. In France, however, 75% of companies -  which are not SMEs, but medium-sized and large enterprises - are concentrated around Paris, while in Germany - despite the E.U. regulations do not accept it - the banking network is still in the hands of the Länder and of KfW - the equivalent of the Italian investment bank "Cassa Depositi e Prestiti" - which supports all banks in crisis, again in defiance of E.U. regulations.

The bank rating is primarily public, i.e. that of the companies specialised in the sector - which, in Italy, are controlled by CONSOB - and the SMEs often cannot afford to pay large sums of money to the rating companies and also wait for a long time before the rating is made official.

The non-official rating that, instead, Italian banks often adopt is - so to speak - "private". It is above all the software that the Bank of Italy makes available to banks to evaluate the companies’ balance sheets and accounts, always based on the principle explained by a great and well-known Italian entrepreneur: "the first balance sheet is for everyone and is submitted to the banks; the second one is seen only by company managers and is not made public; the third is very confidential and is seen only by the CEO and the main shareholder, who never speak about it."

The Bank of Italy' software studies companies according to a geo-sectoral criterion and following the past trends only of the sector to which they belong.

If the rating turns out to be negative - as is often the case in a phase of crisis and in "mature" sectors, where many SMEs still operate - the bank offers them an 8% interest rate, which is completely off-market, or - as often happens - does not grant them any loan, thus making them go bankrupt.

Therefore, also the SMEs must be equipped with a "language" suitable for banking procedures, good accounting tools, such as business plans and management budgets, as well as fintech tools, such as business analysis and professional creditworthiness assessments.

At least initially, this could break the wall of incommunicability that separates the business banking clients from the banks’ way of thinking or not thinking at all.

What could be a possible alternative? The private capital market. In Italy there are 1,375 billion euros of private savings which could be invested productively.

In France and Great Britain, the investment in start-ups is on average, year after year, 2.5 billion euros. In Italy it is worth 160 million euros.

The Prime Minister’s Decree known as “Curaitalia” has established the Guarantee Fund for SMEs, which also provides for long-term operations (over 36 months).

However, will the Guarantee Funds and the Credit Consortia be enough to ensure credit flows to SMEs? I do not think so.

According to the latest data, the Credit Consortia have a very low risk profile. They are currently 34 and are subject to the supervision of the Bank of Italy.

In 2019 they issued guarantees to the tune of 7.3 billion euros.

Hence, once again, they are not sufficient.

Therefore, we officially propose the establishment of a Medium-Long Term Credit Bank dedicated to small and medium-sized enterprises.

You can have access to it with the same criteria as an ordinary industrial credit bank, which can lead the most promising SMEs to be listed on the Stock Exchange or can possibly organize an effective market for the minibonds issued by any small and medium-sized enterprise. 

Ordinary credit banks or, even better, industrial credit banks and companies can be shareholders of our Mediobanca for SMEs. It can also have its own research unit developing analysis and risk profiles for its clients. It can issue debt and credit securities on the market and can also take part in merger, acquisition and expansion operations in foreign markets.

Hence a Mediobanca model specifically adapted to suit Italian SMEs.

 

Professor Valori is President of the International World Group