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

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  • Holton, Sarah
  • McCann, Fergal

Abstract

The post-2008 period in the euro area was characterised by sharp dispersion in borrowing costs faced by firms, across both countries and firm types. This dispersion was an important manifestation of the “financial fragmentation” which hampered the smooth transmission of accommodative monetary policy. Using bank level data from 2007 to 2015, we directly measure the borrowing cost dispersion across firm types by calculating the difference in the interest rate charged by the same bank in the same month for loans to small and large firms (the “Small Firm Financing Premium”, SFFP). We assess the role played by both bank and macroeconomic factors in explaining the variation in the SFFP across countries and through time. We provide evidence that bank market power, sovereign bond holdings and balance sheet weaknesses led to disproportionate borrowing cost increases for small firms, and exacerbated the impact of a weak macroeconomy during this period. JEL Classification: G20, G21, E51

Suggested Citation

  • Holton, Sarah & McCann, Fergal, 2017. "Sources of the small firm financing premium: evidence from euro area banks," Working Paper Series 2092, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172092
    Note: 2452262
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    2. Bredl Sebastian, 2022. "The Role of Non-performing Loans for Bank Lending Rates," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 242(2), pages 223-276, April.
    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

    bank balance sheets; bank market power; cost of credit; SMEs;
    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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