The Wall Street Journal just released an article discussing the effects the new EU banking regulations are having on Europe’s small and medium companies. I found it extremely interesting because it illustrates how these new regulations had an unintended consequence. It found that while the number of loans that banks are able to give out is decreasing, US non-bank lenders are actually filling up the void left by the banks. Non-bank loans given to small, medium countries has almost tripled from 16 to 56 since the beginning of this year. The increase of non-bank loans actually illustrates a shift in Europe’s economic structure. Many of the EU countries are considered coordinated market economies, mainly because the majority of company funding came from banks. Now that banks are restricting companies access to capital, these new direct lending firms are becoming more and more popular. The new banking regulation forces banks to hold larger stores of capital which reduces the supply of loans that they have available for small, medium companies. The idea of direct lending is still fairly new to Europe and hasn’t started to really pick up until this year. Many investors hoped that the new banking regulations would allow for direct lending to pick up in 2011 and 2012. Cheap lending from the ECB though provided companies with the lending that they needed.
The economic impact that the increase in direct lending has on the global economy is unknown. As of right now, I view it as a necessity. The ability for the market to create new opportunities for companies that need loans when banks are unable to is a sign of a growing market. While these new loans are new opportunities for small and medium companies, it comes at a high price. These new loans often come at a higher interest rate and a hefty price tag. Unfortunately, many companies don’t have any other option and have to take on the loans with higher interest rates. Many bank regulators worry that these loans though are easy too easy to come by, aren’t as substantial and safe as bank loans and come at too large a price. One of the worries that I have with the increase in direct lending is the possibilities of another bubble forming in Europe. Some of the companies that are getting these loans are considered risky by the banks when they act under the new banking regulations. It looks like the market has taken into account of the increased risk of these loans by having a relatively high interest rate. As long as these loans don’t become relatively inexpensive, I think the risk of another bubble is relatively low.