The European Commission (EC) has approved the introduction of a new product to support small and medium-sized enterprises (SMEs) through which €1.4 billion in guarantees for loans will be used to back €13 billion of new lending in 22 member states.
This fund is expected to contribute significantly to the European Guarantee Fund’s overall target to mobilise up to €200 billion for the European economy.
By helping to source at least €13 billion of new lending by financial intermediaries to SMEs, which have been severely hit by the COVID outbreak, the EC aims to “continue pursuing [its] goal to support EU businesses, especially SMEs”, according to Executive Vice-President for an Economy that Works for People Valdis Dombrovskis.
Specifically, the product takes the form of guarantees on synthetic securitisation tranches – under the European Guarantee Fund managed by the European Investment Bank Group (EIB Group).
This is a technique by which an ‘originating entity’ like a bank can transfer part of the risk stemming from a portfolio of loans by buying protection on a specific tranche from a protection seller.
Under the new product, the EIB, acting as a said ‘protection seller’ will offer financial intermediaries with protection in the form of a guarantee on a specific risk tranche for a portfolio of existing assets.
Under the scheme, the ‘originating entity’ will be required to pass on any financial advantage stemming from the transaction to the ultimate beneficiaries of the loans – the SMEs.
The idea, according to the EC is that the SMEs will then be able to acquire new loans, because the bank or financial intermediary will be able to use savings to fund new pools of assets (loans) to provide to SMEs.
“The purpose of the new product is to help originate new, riskier lending by financial intermediaries to SMEs. The aim is to free up the lending capacity of financial intermediaries and prevent that their resources are shifted towards lower-risk assets instead of loans to SMEs”, the EC explained.
In April 2020, the European Council endorsed the establishment of a European Guarantee Fund under the management of the EIB Group, as part of the overall EU response to the coronavirus outbreak.
It is one of the three safety nets agreed by the European Council to mitigate the economic impact on workers, businesses and countries.
So far, the EIB and EIF have approved a total of €17.8 billion worth of projects under the Fund, which are expected to lead to some €143.2 billion in total mobilised investments.
All EU Member States have the option to participate in the fund.
So far, 22 Member States have decided to participate and jointly guarantee its operations, including Malta.
“We continue to work closely with Member States and with the other European institutions to find workable solutions to mitigate the economic impact of the coronavirus outbreak, whilst preserving the level playing field in the Single Market”, commented Executive Vice-President Margrethe Vestager, in charge of competition policy.
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