Large Foreign Banks and Small-Medium Sized Enterprises (SMEs): Friends or Foes

This paper provides evidence indicating the importance of foreign banks for the industry dynamics in SME lending market. I explore such dynamics by studying interactively the impact of three aspects of the banking market structure on lending to SMEs, including bank size and its distribution, bank market concentration, and foreign bank presence in Eastern European countries. The results show that larger banks are associated with increasing lending to SMEs, but dominance of very large banks (high inequality in bank size) and high concentration are harmful to SMEs. I also find that the negative effect of dominance of large banks and concentration is largely offset, and that the positive impact of banks size is enhanced by increasing foreign bank presence. The results suggest that the industry dynamics with the presence of large foreign bank break down barriers and create more, not less, opportunities for SMEs to be financed.