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Sources of the small firm financing premium: Evidence from euro area banks

Author

Listed:
  • Holton, Sarah

    (BSI Bank and CEPR)

  • McCann, Fergal

    (Central Bank of Ireland)

Abstract

Conditions in the banking sector have been shown to have a meaningful impact on lending flows and real economic activity, with evidence that these effects are more pronounced for smaller and more bank-dependent borrowers. Using monthly panel data on banks across twelve euro area countries from 2007 to 2015, we investigate the role played by banks' market power, the stability of their funding base, their holdings of sovereign debt and measures of their balance sheet health on the relative interest rate they charge on small versus large large loans (the Small Firm Financing Premium, SFFP), as a proxy for the cost of credit to small versus large firms. We find strong evidence that bank market power, sovereign bond holdings and balance sheet weaknesses lead to disproportionate borrowing cost increases for small firms, and that these features act to exacerbate the impact of a weak macroeconomy. This paper provides evidence that smaller firms, who are more dependent on the banking sector, are affected more by bank balance sheet weakness than larger firms.

Suggested Citation

  • Holton, Sarah & McCann, Fergal, 2016. "Sources of the small firm financing premium: Evidence from euro area banks," Research Technical Papers 09/RT/16, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:09/rt/16
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    References listed on IDEAS

    as
    1. Rieth, Malte & Fratzscher, Marcel, 2014. "Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100277, Verein für Socialpolitik / German Economic Association.
    2. repec:oup:rfinst:v:31:y:2018:i:8:p:2855-2896. is not listed on IDEAS
    3. Balduzzi, Pierluigi & Brancati, Emanuele & Schiantarelli, Fabio, 2018. "Financial markets, banks’ cost of funding, and firms’ decisions: Lessons from two crises," Journal of Financial Intermediation, Elsevier, vol. 36(C), pages 1-15.
    4. Ryan, Robert M. & O’Toole, Conor M. & McCann, Fergal, 2014. "Does bank market power affect SME financing constraints?," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 495-505.
    5. Michiel van Leuvensteijn & Christoffer Kok Sørensen & Jacob A. Bikker & Adrian A.R.J.M. van Rixtel, 2013. "Impact of bank competition on the interest rate pass-through in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(11), pages 1359-1380, April.
    6. Fenghua Song & Anjan V. Thakor, 2007. "Relationship Banking, Fragility, and the Asset-Liability Matching Problem," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2129-2177, November.
    7. Carlo Altavilla & Fabio Canova & Matteo Ciccarelli, 2016. "Mending the broken link: heterogeneous bank lending and monetary policy pass-through," Working Papers No 9/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    8. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
    9. Alexander Popov & Neeltje van Horen, 2013. "The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis," DNB Working Papers 382, Netherlands Central Bank, Research Department.
    10. Viral V Acharya & Tim Eisert & Christian Eufinger & Christian Hirsch, 2018. "Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans," Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 2855-2896.
    11. Holton, Sarah & Rodriguez d'Acri, Costanza, 2015. "Jagged cliffs and stumbling blocks: interest rate pass-through fragmentation during the Euro area crisis," Working Paper Series 1850, European Central Bank.
    12. Holton, Sarah & Rodriguez d’Acri, Costanza, 2015. "Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-through Fragmentation during the Euro Area Crisis," Research Technical Papers 01/RT/15, Central Bank of Ireland.
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    Cited by:

    1. Bredl, Sebastian, 2018. "The role of non-performing loans for bank lending rates," Discussion Papers 52/2018, Deutsche Bundesbank.
    2. repec:eee:jbfina:v:96:y:2018:i:c:p:277-291 is not listed on IDEAS

    More about this item

    Keywords

    SMEs; Cost of Credit; Bank Balance Sheets; Bank Market Power;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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