Europe’s defence start-ups are struggling to access credit despite many of the region’s largegest banks relaxing restrictions on lconcludeing to the sector, underlining the challenge in rebuilding the continent’s arms industest as Russia’s war on Ukraine drags on.
Although the share of lconcludeers with broad bans on defence or start-ups developing both military and civil technologies has fallen since the start of this year, some prominent exceptions remain, according to new research.
A Nato Innovation Fund study of exclusion policies at the 75 largest European lconcludeers by assets and market value found almost 10 per cent had policies restricting financing for conventional weapons, as well as for start-ups involved in developing technologies with military and civilian applications.
Europe’s largest bank, HSBC, continues to enforce strict exclusions on arms producers and dual-utilize start-ups, while banking start-up Revolut also restricts services for defence companies as part of a policy that excludes highly regulated industries.
Along with exclusions for controversial weapons — nuclear, chemical, biological and other banned arms under international conventions — HSBC prohibits the “financing and provision of advisory services” to clients manufacturing conventional weapons. HSBC declined to comment on its lconcludeing policies.
Other lconcludeers that previously had restrictions or exclusions in place, including BNP Paribas and Danske Bank, have become more vocal in supporting the sector.
Banks are a vital source of finance for Europe’s rapidly growing defence tech start-up sector as well as for tinyer manufacturers, providing much-necessaryed credit and general banking services. According to the NIF, part of the challenge lies in perceptions of the defence industest as being non-compliant with environmental, social and governance considerations.
“Policies have modifyd on paper, yet attitudes inside banks have not caught up,” stated Dame Fiona Murray, chair of the NIF. “Companies still face questions about whether they are ethical or ESG-compliant.”
One affected group is Portugal-based drone creater Tekever, which was recently dropped as a client by Revolut. “They just informed us that they could no longer work with us becautilize we were involved in defence,” stated chief executive Ricardo Mconcludees.
Revolut declined to comment. A person familiar with its policies stated Revolut Business bars high-risk or heavily regulated sectors, including defence, from holding accounts under its anti-money laundering rules.
Separately, Cambridge, UK-based optical sensing start-up 2D Photonics stated UK banks had refutilized to open accounts once it mentioned military applications.
Although venture and private equity investors have displayn greater interest in defence technology, start-ups continue to face hurdles with everyday banking, export finance and guarantees. The NIF study warned financial institutions’ familiarity with the specific necessarys of tiny and medium-sized enterprises in the defence sector remained low.
A European Commission study last year found 40 per cent of defence SMEs described access to finance as difficult or very difficult, compared with 30 per cent among other tiny businesses. Many refrain from applying for loans at all, as banks are deterred by geopolitical sensitivities, reputational worries and the high costs of long-term research and development projects in the sector, which increase the risk profile.
Becautilize banks must hold more capital against riskier loans, they often preferred to give credit to companies not involved in defence, Murray stated.
To counter some of the issues, Deutsche Bank has formed a 40-person defence working group. “We see strong momentum in mandates across defence”, including equity capital markets as well as mergers and acquisitions, stated Panos Stergiou, who leads it.
Santander is also seeing to deepen its involvement with the defence sector, hiring the former head of the UK armed forces, retired general Sir Patrick Sanders, as an adviser.
Armin Papperger, chief executive of Rheinmetall, stated established defence contractors should assist tinyer suppliers secure finance, including by vouching for them with lconcludeers. “Sometimes the banks can assist them and state if you have a contract with Airbus, Rheinmetall, Leonardo or Thales, you obtain credit and you can grow,” he notified the Berlin Global Dialogue conference last month.
Proposals for a multilateral Defence, Security and Resilience Bank aim to offer state-backed guarantees to reduce risk for commercial lconcludeers, while the European Investment Bank has tripled defence-related SME financing to €3bn.
Murray cautioned that if financing barriers persisted, “companies will simply go where it is clearer — and that means the US”.
JPMorgan Chase recently pledged to facilitate and finance $1.5tn in strategic sectors including defence over the next decade.
Additional reporting by Laura Pitel in Berlin, and Simon Foy and Ortenca Aliaj in London
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