The European Institutional Environment and SME Relationship Lending: Should We Care?

Gines Hernandez-Canovas and Johanna Koeter-Kant
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Gines Hernandez-Canovas: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 19, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: This paper examines the impact of country specific determinants on multiple banking using a unique survey sample of 4959 SMEs from 19 European countries. Our data shows that (1) SMEs in countries with inefficient loan enforcement mechanisms are more likely to maintain multiple bank relationships, (2) the association between multiple banking and bank fragility is non-monotonous, being negative when the banking system is relatively stable and positive for high values of bank fragility, and (3) multiple banking is more likely for SMEs in countries with larger banking systems as well as smaller and less active securities markets. Overall, this evidence suggests that SMEs need multiple banking as a diversification mechanism to overcome expensive adverse selection that may arise within a country that suffers from an inefficient legal system and fragile banks, but also that movement towards a more market based financial system decreases the likelihood of multiple bank relationships for SMEs. These findings have important implications for policy makers in Europe when contemplating SME access to finance.

Keywords: SMEs; Relationship Lending; Banks (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:vua:wpaper:2006-19

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