Interbank Market Integration, Loan Rates, and Firm Leverage
University of Zurich - Department of Banking and Finance; Swiss Finance Institute
Alexander A. Popov
European Central Bank (ECB)
November 1, 2009
22nd Australasian Finance and Banking Conference 2009
We study the effect of interbank market integration on small firm finance in the build-up to the current financial crisis. We use a comprehensive data set that contains contract terms on individual loans to 6,000 firms across 14 European countries between 1998:01 and 2005:12. We account for the selection that arises in the loan request and approval process. Our findings imply that integration of interbank markets resulted in less stringent borrowing constraints and in substantially lower loan rates. The decrease was strongest in markets with competitive banking sectors. We also find that in the most rapidly integrating markets, firms became substantially overleveraged during the build-up to the crisis. Our evidence thus points to one specific channel through which the credit boom of the last decade contributed to both the growth and the vulnerability of the region's non-financial firms.
Number of Pages in PDF File: 41
Keywords: interbank markets, financial integration, selection, loan rates, bank competition, firm leverage
JEL Classification: E51, G15, G21, G34
Date posted: August 1, 2009 ; Last revised: October 8, 2010
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