Bank competition and firm credit availability: firm-bank evidence from Europe

This paper examines the impact of bank competition on firms' access to credit using a large panel of 900 banks matched to almost 60.000 firms across the euro area over the period 2010-2016. Results provide empirical support for the market power hypothesis whereby low interbank competition worsens firms' credit conditions. We find that higher bank market power is associated with lower short-term bank credit and higher trade credit for customer firms. Furthermore, high bank market power is especially detrimental for small, low quality and opaque firms, suggesting that lower inter-bank competition exacerbates the financial constraint of borrowers that are more exposed to information problems. By contrast, we find limited evidence consistent with the information hypothesis: among firms related to banks with high market power, only those served by small and local cooperatives obtain more bank credit. This finding highlights the relative importance of specialisation, ownership structure and local outreach in favouring credit relationships between borrowers and lenders.