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Bank Competition Through The Credit Cycle: Implications For SME Financing

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Author Info

  • McCann, Fergal

    (Central Bank of Ireland)

  • McIndoe-Calder

    (Central Bank of Ireland)

Abstract

In this letter a series of stylized facts are presented on competition in Irish private sector lending markets across periods of both significant economic expansion and decline. Firstly, concentration of lending to the private sector is shown to have fallen during the boom period of 2004-2008, and to have steadily risen since the onset of the crisis. Secondly, we document that the lending market for Small and Medium Enterprises (SMEs) is significantly more concentrated than that for the private sector in total. Thirdly, we observe a degree of heterogeneity in the concentration of lending to different sectors of economic activity. Fourthly, concentration of new lending flows to SMEs in 2010 and 2011 is shown to be significantly higher than concentration of the stock of credit across all sectors, suggesting that the trend is towards even higher concentration in the SME market. Finally, it is apparent that the share of foreign banks in private sector credit stock reached its peak just as the crisis began, and has been falling since, indicating that in times of crisis foreign market participants react by more aggressively reducing exposure than domestic banks. The likely effect on Irish firms’ access to finance is discussed by placing these findings in the context of the literature on the link between banking competition and credit conditions. Our results suggest that firms, and particularly SMEs, will experience increasingly difficult credit conditions as a result of increased concentration in the lending market. In this light, policy measures aimed at alleviating credit constraints are of particular importance.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Economic Letters with number 04/EL/12.

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Date of creation: Apr 2012
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Handle: RePEc:cbi:ecolet:04/el/12

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Related research

Keywords: Competition; Herfindahl Index; Private Sector Credit; SMEs; Foreign Banks; Access to Finance; Financial Stability;

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  1. Degryse, H.A. & Havrylchyk, O. & Jurzyk, E. & Kozak, S., 2009. "Foreign Bank Entry and Credit Allocation in Emerging Markets," Discussion Paper 2009-044, Tilburg University, Tilburg Law and Economic Center.
  2. Chong, T.T.L. & Lu, L. & Ongena, S., 2011. "Does Banking Competition Alleviate or Worsen Credit Constraints Faced by Small and Medium Enterprises? Evidence from China (Replaced by CentER DP 2012-013)," Discussion Paper 2011-006, Tilburg University, Center for Economic Research.
  3. Lawless, Martina & McCann, Fergal, 2011. "Credit Access for Small and Medium Firms: Survey Evidence for Ireland," Research Technical Papers 11/RT/11, Central Bank of Ireland.
  4. Ralph De Haas & Neeltje Van Horen, 2013. "Running for the Exit? International Bank Lending During a Financial Crisis," Review of Financial Studies, Society for Financial Studies, vol. 26(1), pages 244-285.
  5. Goggin, Jean & Holton, Sarah & Kelly, Jane & Lydon, Reamonn & McQuinn, Kieran, 2012. "Variable Mortgage Rate Pricing in Ireland," Economic Letters 02/EL/12, Central Bank of Ireland.
  6. Zarutskie, Rebecca, 2006. "Evidence on the effects of bank competition on firm borrowing and investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 503-537, September.
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