This article is part of our special report SME’s Access to Finance.
The worsening situation of European banks is likely to hit hardest on financial flows to small businesses which are already heavily suffering from the consequences of the crisis, policymakers and sector specialists have warned.
European Central Bank chief Jean-Claude Trichet last week warned that eurozone banks need to strengthen their balance sheets, as worries mount over the sector's exposure to Greek debt.
The Bank of China's decision to halt on foreign exchange swaps with several European banks, as well as the ECB's money market operations, were the latest signs that debt and economic woes are spreading to the financial sector.
"The European banking sector has to reinforce its balance sheet and improve its resilience," Trichet said, reinforcing fears of an impending credit crunch.
The French SME organisation, la Confédération Générale des Petites et Moyennes Entreprises, warned that at the same time the increasing instability in the banking sector threatened to dry up lines of credit to SMEs.
SMEs set for heavy punishment
In a statement the group said: "The solidity of the banking sector needs to be secure, because without that economic community, and especially SMEs, will be heavily punished as a result of the scarcity of available credit."
European banks are being squeezed not only by the euro crisis but also by tougher regulations and looming capital requirements under the Basel III regime.
Danish MEP Bendt Bendtsen, who chairs the SME circle at the European People's Party (EPP), said: "Basel's stricter capitalisation rules will not hit the big companies, the great companies such as Siemens and Carlsberg. They have access to capital because they have cash flow, and this crisis is hitting the small companies much, much worse than the big ones."
In October the ECB is due to release its latest report on the condition of access to finance for SMEs. Bendtsen said: "It is not rocket science: it has been more difficult for SMEs to get money these past six months. When I speak to my colleagues in the SME circle it is the same problem in all the member states, the banks need more capital to get them through the bad times and so it's harder for SMEs to get access to it."
Struggling to keep afloat
According to Gerhard Huemer, the director for economic and fiscal policy at the European Association of Craft, Small and Medium-sized Enterprises (UEAPME), the worsening conditions come at a critical moment since the weaker SMEs have not been able to invest in the past six months.
He said: "They will struggle to stay in the market."
Meanwhile the French have responded by creating an SME-funding mechanism via a new partnership between state-owned fund CDC Entreprises, public bank OSEO and the state's national strategic investment funds.
Described as sort of "SME super bank", the new structure aims to rationalise the various state support funding mechanisms for French SMEs, and simplify the procedures by which companies apply for the funds.
The EU is set to publish an action plan on access to funding for SMEs in December this year.