Banking sector, intangible assets and digitalization of the economy

Article by Joaquín Maudos, Professor of Economic Analysis at the University of Valencia, published by the Spanish think tank FUNCAS, in which he analyzes the importance of investment in intangible assets to increase productivity and digitalize the economy, and proposes specific measures to incentivize bank financing of this type of assets.

The article proposes specific measures to promote bank financing of intangible assets and provides answers to several questions regarding the digitalization of the economy:

• What does it mean to digitalize the economy and invest in intangible assets? According to the article, when we talk about digitalization we refer to technologies such as the internet of things, artificial intelligence, big data, blockchain, e-cloud... All those technologies require investments in R&D, in databases, in software, in design, in the digital skills of employees, etc.
   
• Why should the economy be digitalized? Increasing competitiveness requires increasing productivity and for this purpose the digitalization is playing a key role, based on extensive empirical evidence.
   
• The Spanish economy invests in intangible assets below the European average: Spain's investment effort in intangible assets with respect to GDP (5.6%) is below the EU average (8.3%) and far from economies like France or the Netherlands (10%), specifically in R&D.
   
• Why encourage bank financing of intangible assets? To reduce the "investment gap" and promote digitization, which is one of the priority objectives of the European Recovery and Resilience Plan. Until now, according to the article, "the main means of financing intangibles is through the companies' own resources or through venture capital, with bank financing being of very little importance”. However, the expected strong growth in investment in intangible assets will henceforth require greater financing efforts, which should imply the participation of the banking sector. In order to encourage the involvement of traditional banks in the financing of this type of assets, some specific measures would be necessary, bearing in mind that it could also be a source of new business for the sector.
   
• Why has it been difficult until now to finance intangible assets through traditional banking? Intangible assets are more difficult to use as a collateral in bank financing because they have a more complex valuation than that of tangible assets and because they offer a more uncertain return than that of traditional businesses.
   
• Proposals to encourage bank financing in intangible assets:

1. Supporting factor in the calculation of risk-weighted assets for bank financing of intangible assets, similar to the reducing factor applied to SMEs and certain strategic infrastructures.
    
2. Public guarantees for the financing of intangibles, in a similar way to the guaranteed lines for companies in difficulties due to the pandemic, which would provide some protection from losses in loans to invest in intangibles.