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Interbank market integration, loan rates, and firm leverage

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  • Ongena, Steven
  • Popov, Alexander

Abstract

We study the effect of interbank market integration on small firm finance in the build-up to the 2007-2008 financial crisis. We use a comprehensive data set that contains contract terms on individual loans to 6,047 firms across 14 European countries between 1998:01 and 2005:12. We account for the selection that arises in the loan request and approval process. Our findings imply that integration of interbank markets resulted in less stringent borrowing constraints and in substantially lower loan rates. The decrease was strongest in markets with competitive banking sectors. We also find that in the most rapidly integrating markets, firms became substantially overleveraged during the build-up to the crisis. JEL Classification: E51, G15, G21, G34

Suggested Citation

  • Ongena, Steven & Popov, Alexander, 2010. "Interbank market integration, loan rates, and firm leverage," Working Paper Series 1252, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20101252
    Note: 861282
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    References listed on IDEAS

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    More about this item

    Keywords

    bank competition; firm leverage; interbank markets; loan rates; selection;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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