Non-bank Lenders to SMEs: Sensitivity to Financial Conditions

We use credit registry data on lending to businesses in Ireland, a developed, small open economy, which has a significant share of new credit to firms provided by non-bank lenders. We assess whether lending from non-banks reacts more sensitively in comparison to banks to a tightening in financial conditions. We use a fixed effects approach to isolate credit supply effects and show that non-banks contract lending to a greater degree than banks in response to tightening financial conditions. We also highlight the critical importance of looking beyond the binary classification of banks versus non-banks when conducting analysis on how the increased role of non-banks in direct lending may affect financial stability. We show that asset finance providers and general lenders do not contract lending in response to a tightening in financial conditions, and instead increase credit supply in comparison to the banking sector. In contrast, specialist property lenders react negatively and strongly, contracting lending significantly in comparison to banks.