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Bank Competition Through The Credit Cycle: Implications For SME Financing

Author

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  • 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.

Suggested Citation

  • McCann, Fergal & McIndoe-Calder, 2012. "Bank Competition Through The Credit Cycle: Implications For SME Financing," Economic Letters 04/EL/12, Central Bank of Ireland.
  • Handle: RePEc:cbi:ecolet:04/el/12
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    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/economic-letter---vol-2012-no-4.pdf?sfvrsn=10
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    References listed on IDEAS

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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 2009-94, Tilburg University, Center for Economic Research.
    2. 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.
    3. Chong, Terence Tai-Leung & Lu, Liping & Ongena, Steven, 2013. "Does banking competition alleviate or worsen credit constraints faced by small- and medium-sized enterprises? Evidence from China," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3412-3424.
    4. 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.
    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. 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.
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    Cited by:

    1. Mary M. Everett, 2015. "Blowing the Bubble: The Global Funding of the Irish Credit Boom," The Economic and Social Review, Economic and Social Studies, vol. 46(3), pages 339-365.
    2. Lawless, Martina & O'Toole, Conor & Lambert, Derek, 2014. "Financing SMEs in Recovery: Evidence for Irish Policy Options," Research Series, Economic and Social Research Institute (ESRI), number BKMNEXT276.
    3. Aisling Menton & Martina Sherman, 2015. "Analysis of the Irish SME market using micro-data," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Indicators to support monetary and financial stability analysis: data sources and statistical methodologies, volume 39 Bank for International Settlements.

    More about this item

    Keywords

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

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