According to the International Monetary Fund’s analysis of 58 of the continent’s largest banks, the European financial institutions look set to shrink their balance sheets by $2.6 trillion over the next 18 months. Worryingly a quarter of the deleveraging looks likely to come from cuts in lending.

The IMF’s Global Financial Stability Report (GFSR) published last Wednesday warned that if officials did not step up their policy response European Banks could drop almost 7% of their assets by the end of 2013.

Most of the deleveraging is expected to come from the sales of securities and non-core assets, however the IMF sees credit supply shrinking by 1.7% as banks reduce lending to businesses and private households.

It is clear that balance sheets need to shrink, that has been acknowledged by the IMF, but what is not good is a ‘synchronised and large-scale deleveraging’ that could act as a catalyst for further financial instability and weaker growth in Europe.

So what does this mean for small and medium sized businesses? The European Banking Authority (who were submitted plans by regulators) and IMF assessments assume the bulk of the deleveraging will occur through asset sales, rather than a drop off in lending. Although this does mean that the credit supply is still shrinking and thus limiting lending for UK businesses.

The assessment by the IMF highlights that SMEs who rely too much on bank lending may be badly affected by bank deleveraging. This begs the question that maybe traditional bank finance is not really the most appropriate method for start-ups and early stage companies to use.

Now more than ever it seems appropriate that businesses should turn to the private sector for an alternative way of working capital finance. Many relatively young tech start-ups offer options that are different from traditional bank products, from new entrants to the banking market, to crowd-sourced equity providers, peer-to-peer lending, as well MarketInvoice’s own model of online auctioning for invoice finance.

Further Reading

• IMF: Global Financial Stability Report
• IMF fears $3.8 trillion forced asset sale by eurozone banks
• IMF sees banks deleveraging by $2.6tn