A better road to recovery
Small and medium-sized enterprises (SMEs) are of particular concern, but bank risk assessments vary country by country. In the US, bankruptcy filings hit a 35-year low in 20201 due to government stimulus measures. However, in Southern European countries, the rate of SME insolvencies will likely increase,2 impacting banks’ return on equity. The EY/IIF survey shows that, in general, European banks expect returns within a range of 5% to 10% over the next three years. Conversely, over a third of banks in the US expect returns of above 16%.
Offering better support to SMEs is one of the main talking points among CROs as the crisis subsides. One of the main sticking points lies in identifying which SMEs have been hit hard by the pandemic, but still have viable business models, and distinguishing those from so-called “zombie” companies (i.e., firms that can’t be self-sustaining).
Given the need for many to evolve in a post-pandemic world, SMEs will increasingly look to embedding an environmental, social and governance (ESG) framework into their business models, in line with larger firms. In doing so, SMEs can initiate a fresh conversation with their bank on how to work towards a zero-carbon economy – ultimately CROs will play an important role in helping manage and price the associated risks as part of the bank’s overall sustainability strategy.