Cast Adrift

The experts used to say that financial innovation and the globalization of finance were unequivocally good things because they prevented too much risk from being concentrated in too few hands

What they didn't allow for was the fact that spreading risk far and wide would ensure that major shocks to the system would quickly reverberate throughout the global financial system, causing incalculable damage.

Many of those same experts also used to say that bigger was better and that efficiency could best be achieved by disintermediation and a reliance on market-based mechanisms.

Again, what they failed to take into account was the fact that if market conditions were less than ideal, those firms that took these ideas fully to heart would turn out to be especially vulnerable.

Indeed, as the Financial Times reports in "Credit Squeeze Hits Larger Companies Hardest," many of the firms that were supposedly better able to weather economic storms are taking on a lot of water.

Large companies in Europe and the US are having the terms of their credit facilities tightened more quickly and more severely than smaller companies – in contradiction of received wisdom.

Surveys by the European Central Bank, US Federal Reserve and Germany’s Ifo economics institute all show banks tightening their lending criteria most for the largest companies.

Possible reasons put forward for this shift in attitude include smaller companies enjoying a better relationship with their banks, and financial institutions shying away from making large loans and preferring to deal with local groups, rather than multinationals.

Chris Williamson, chief economist of Markit data provider, said: “Large companies drove the credit-fuelled expansion but – especially in November – we have seen a big reversal of that”.

André Kunkel, head of surveys at Ifo, said: “For the last few years, big companies consistently had it easier but then, in recent months, they saw a huge worsening in credit conditions. Lending terms have dramatically tightened for big companies.”

Banks in the eurozone have tightened the credit conditions for 68 per cent of large companies but only 56 per cent of small and medium-sized enterprises (SMEs), according to the European Central Banks latest survey.

Similarly, the Fed’s latest lending survey shows that 95 per cent of banks have tightened conditions for large companies whereas only 90 per cent have done so for smaller ones.

Ifo’s figures for December in Germany are even more dramatic, with the number of large companies reporting tightened loan terms more than doubling from August to 48 per cent. By contrast, only 36 per cent of mid-sized companies and 35 per cent of small companies reported stricter terms.

Some analysts suggest the difference in approach is to do with a re-evaluation of risk. Mr Williamson said: “SMEs are seen as less risky if you are the lending risk officer for a bank, as the risk of default for large companies is at an all-time high”.

Philip Isherwood, European equity strategist at Dresdner Kleinwort, suggested it could be simply that banks had applied far laxer conditions to larger companies previously and were “now playing catch-up”.

Mr Kunkel also underlined how the largest companies often had alternative sources of financing such as bonds and rights issues while small companies were dependent on their house banks.

In Germany, many small companies deal with Sparkassen, local savings banks that have been relatively untouched by the financial crisis and have in many cases increased their lending.

But small companies are still suffering from a lack of credit and a number of industry associations across Europe have sounded the alarm about viable businesses being in danger because of difficulties in finding finance.

Mr Williamson said banks might also prefer to deal with local companies, where they know the business and the customers, rather than with multinationals, where problems might be hidden overseas.

Large companies across Europe are also seeing production and employment fall faster than at smaller groups, according to a Markit survey.

Comments

[the_economist]

I just got a letter of credit for my company. Credit is there if you qualify.
Banks have just gone back to their old model. They only want to lend to credit worthy companies.

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