SME ABS sounds like a pre-crisis acronym that spells disaster, but European policymakers are hoping it could be the answer to the funding dilemma facing many SMEs.

By Farah Khalique

Banks face higher capital requirements under stringent new banking regulations, meaning they have to put aside more capital when lending to companies than they did pre-crisis and, as such, have cut back on lending.

Large companies can turn to debt capital markets to fund themselves, but SMEs are too small and financially opaque to be attractive to bond investors, and still rely on banks.
The key to this dilemma could be to securitise existing SME loans on banks’ books, known as SME asset-based securitisation (ABS).
Banks can bundle up SME loans to create a single entity called a "securitisation", move it off their balance sheet and sell it to investors as you would a bond. The principal amount and the interest on the debt are paid back to investors over time.
This also frees up capital that banks would otherwise hold against the original loans, which can in turn be used to lend to companies.
SME ABS has existed for years, but securitisation became a dirty word during the crisis. Now the European Central Bank is hoping to reignite the ABS market with its ABS purchase plan, which started in fourth quarter of 2014.
Rating agency Moody’s also believes it is time for a revival. Last year, it upgraded all its European SME collateral outlooks to a stable rating, including Spain and Italy which were previously negative.
Ariel Weil, vice president and senior analyst at Moody’s said that despite the cyclical nature of SME activity, SME ABS actually performed strongly over the course of the financial crisis.
But European investors remain cautious and volumes are muted, as the process of securitisation can be costly, according to Weil. Time will tell if the ECB's purchase plan does indeed revive the ailing ABS market, but the political will is at least there to try and make it work.

Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter