Local versus national banking development in Europe: who is the winner?

Abstract

This article investigates the role of local banking development, per se, in European SME debt policies, using a cross-country dataset. Moreover, it assesses whether the debt policies of SMEs are mainly driven by local or national banking development. We find that higher levels of local banking development increase the amount of debt used by SMEs. Results suggest that national banking institutions reduce the influence of local banking sectors on SME financial behavior. Several robustness and further tests validate our results, suggesting that whilst the process of international integration and digitalization of financial markets, local banking development is still relevant despite the moderating role of national banking policies. Consequently, policy makers should first and foremost allow headquarters and central banks to better support local banks in integrating national banking policies in order to reduce the financial constraints on SMEs and spur their economic growth.