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

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  • 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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    3. Olli-Matti Juhani Laine, 2020. "The effect of the ECB’s conventional monetary policy on the real economy: FAVAR-approach," Empirical Economics, Springer, vol. 59(6), pages 2899-2924, December.
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    5. Ridouan, Allaa, 2020. "Does religiosity have an influence on the small and medium-sized enterprise managers’ will to use Islamic finance loans?," LIDAM Discussion Papers LFIN 2020012, Université catholique de Louvain, Louvain Finance (LFIN).

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    More about this item

    Keywords

    SMEs; Cost of Credit; Bank Balance Sheets; Bank Market Power;
    All these keywords.

    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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