Bank Compliance Slow Services for Some in Europe’s Growing Defense Sector

European lenders are re-engaging with defense companies but smaller firms in the sector’s supply chain are running into hurdles clearing bank compliance requirements, according to new reporting by The Banker.

While banks have largely reversed their previous reticence to engage with the defense sector, chief executives of start-ups in western and southern Europe attending last month’s DSEI trade fair in London reported that opening a UK bank account could take two to three months because of lengthy compliance checks, Alexander Mann, global head of industrials at Commerzbank, told the news outlet.

Make UK Defence, a trade association, told The Banker that some smaller British manufacturers struggle to access basic banking services.

Despite not doing work in the sector, one UK company in metal fabrication risked losing its bank account during a routine review after its “gundrilling” manufacturing technique was assumed to be weapons-related and the word “defense” appeared in its records, the news outlet said.

Another company seeking to manufacture drones to support Ukraine was denied services by its High Street bank due to restrictions on clients in defense-linked sectors, according to The Banker.

UK Finance said many lenders remain committed to supporting defense companies, the small- and midsize enterprises known as “SMES,” but noted that the regulatory environment can make financing complex and require higher levels of due diligence and risk assessment.

A recent Royal United Services Institute report cited by The Banker said such standards can create a “reporting burden,” with banks “less inclined” to help SMEs navigate compliance compared with larger companies.

Despite the easing of reputational risk for lending to defense companies, financing smaller firms remains difficult due to policy uncertainty, according to an unnamed banker who spoke to the news outlet.

“They’re getting business now, but if policy changes, your financing commitments for the next five years or so will be in trouble,” the person said. “They’re getting business now, but if policy changes, your financing commitments for the next five years or so will be in trouble.”