Reduced cross-border lending and financing costs of SMEs

Franziska Bremus,Katja Neugebauer

doi:10.1016/j.jimonfin.2017.09.006

Abstract

This paper investigates how the withdrawal of banks from their cross-border business impacted the borrowing costs of European firms since the crisis. We combine aggregate information on total and cross-border credit with firm-level survey data for the period 2010–2014. We find that the decline in cross-border lending led to a deterioration in the borrowing conditions of small firms. In countries with more pronounced reductions in cross-border credit inflows, the likelihood of a rise in firms’ external financing costs increased. This result is mainly driven by the interbank channel, which plays a crucial role in transmitting shocks to the real sector across borders.

Highlights

This study aims at contributing to a better understanding of the impact of changes in international credit market integration on the real economy
Given that the global nancial crisis led to a considerable retrenchment in international capital ows, our goal is to investigate how the reduction in cross-border bank lending aected the access to nance for small and medium-sized enterprises (SMEs) in the euro area
We nd some evidence that rms in countries with higher credit default swap (CDS) spreads are less likely to apply for loans

Summary

Introduction

This study aims at contributing to a better understanding of the impact of changes in international credit market integration on the real economy. Previous literature shows that nancial integration alleviates the nancing constraints of rms Given that the global nancial crisis led to a considerable retrenchment in international capital ows, our goal is to investigate how the reduction in cross-border bank lending aected the access to nance for small and medium-sized enterprises (SMEs) in the euro area. We contribute to the literature by analyzing the implications of credit market fragmentation for SMEs within the euro area, while other studies focus on developing or emerging economies. When comparing the importance of credit inows to banks and to non-banks for this eect, we nd that it is mainly the fragmentation of the interbank credit market that drives the negative link between cross-border credit and credit costs of SMEs in the euro area

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Results

Conclusion