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

Sarah Holton and Fergal McCann ()
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Sarah Holton: BSI Bank and CEPR

No 09/RT/16, Research Technical Papers from Central Bank of Ireland

Abstract: Conditions in the banking sector have been shown to have a meaningful impact on lending flows and real economic activity, with evidence that these effects are more pronounced for smaller and more bank-dependent borrowers. Using monthly panel data on banks across twelve euro area countries from 2007 to 2015, we investigate the role played by banks' market power, the stability of their funding base, their holdings of sovereign debt and measures of their balance sheet health on the relative interest rate they charge on small versus large large loans (the Small Firm Financing Premium, SFFP), as a proxy for the cost of credit to small versus large firms. We find strong evidence that bank market power, sovereign bond holdings and balance sheet weaknesses lead to disproportionate borrowing cost increases for small firms, and that these features act to exacerbate the impact of a weak macroeconomy. This paper provides evidence that smaller firms, who are more dependent on the banking sector, are affected more by bank balance sheet weakness than larger firms.

Keywords: SMEs; Cost of Credit; Bank Balance Sheets; Bank Market Power (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-ban and nep-eec
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Sources of the small firm financing premium: Evidence from euro area banks (2021)
Working Paper: Sources of the small firm financing premium: evidence from euro area banks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cbi:wpaper:09/rt/16

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