Bankers race to catch up with EU defence goals in stunning reset

Europe’s Defence Reboot: Banks Under Pressure to Finance Military Growth

As Europe makes defence its number one priority, it’s running into resistance from its own bankers. Defence industry executives, politicians, and senior bankers are calling for an urgent overhaul of regulations and internal processes to make it easier for banks to quickly channel funds into arms manufacturers and military contractors.

"Many defence firms have had trouble with simple things like getting a bank account," said Florian Seibel, the co-founder of Quantum Systems, a maker of surveillance drones that operates in Ukraine. "At a working level, the bank staff will say, ‘Of course we should finance this defence project.’ But then the deal is blocked as it goes against some internal rule."

It’s a common refrain from European defence startups working on everything from new drone technologies to advanced surveillance equipment. Their experience shows that the ways banks do business in some of Europe’s biggest markets don’t match the political moment.

The Urgent Need for Defence Financing

The urgent need to ramp up Europe’s military defences was laid bare during a now-infamous Oval Office meeting, in which Ukraine President Volodymyr Zelensky was publicly berated by President Donald Trump. The US has since suspended military aid to Kyiv.

European leaders are now rallying around Zelensky, pledging hundreds of billions of euros in support. European Commission President Ursula von der Leyen has declared this a "watershed moment."

Banks Under Pressure to Finance Defence

The rapid turn of events has taken European banks by surprise. The industry has been accustomed to treating arms manufacturers as a reputational liability, thanks to rules designed to weed out high-risk clients or to discourage lending to sectors that clash with ESG (environmental, social, and governance) metrics.

"Unless a number of tangible levers are pulled, Europe will struggle to finance a new wave of defence growth," said Fabrizio Campelli, a top executive at Germany’s biggest lender, Deutsche Bank.

Europe should be "simplifying and harmonising" some of the definitions of sustainable finance to make defence a "more bankable" sector, Campelli said.

Progress is Slow

So far, however, progress appears to be slow. Patrick Schneider-Sikorsky, partner at Nato Innovation Fund (NIF), said he’s seen plenty of examples to indicate the political mood has yet to filter through to banks. In a recent report, NIF found that defence companies continue to face a "significant barrier" when seeking financing from the private sector, with both asset managers and banks citing ESG restrictions that mean arms manufacturers get treated as "sin stocks."

A Different Picture in the US

It’s a very different picture in the US. Since Russia’s invasion of Ukraine in February 2022, the biggest providers of bonds and syndicated loans to the defence industry are all US banks, according to data compiled by Bloomberg.

JPMorgan Chase leads the Bloomberg league table, having provided more than $28 billion in the period, the data shows. It’s followed by Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. The highest-ranked European bank is BNP Paribas, in ninth place, the data shows.

Conclusion

As Europe struggles to create the financial conditions for a thriving defence industry, the need for change is clear. Banks must work to simplify and harmonise their processes, and defence companies must be able to access the financing they need to grow and innovate. The stakes are high, and the time for action is now.

FAQs

Q: What is the current situation with defence financing in Europe?
A: Defence companies in Europe are struggling to access financing due to ESG restrictions and internal bank processes.

Q: What is the situation in the US?
A: In the US, major banks such as JPMorgan Chase, Bank of America, and others are providing financing to the defence industry.

Q: What is the European Commission’s stance on defence financing?
A: European Commission President Ursula von der Leyen has declared this a "watershed moment" and has pledged hundreds of billions of euros in support.

Q: What is the role of the European Investment Bank in defence financing?
A: The European Investment Bank is looking into having its mandate expanded to give it more leeway to finance military projects.

Q: What is the role of state development banks in defence financing?
A: Germany’s state development bank, KfW, is set to play a major role in ratcheting up defence spending.