Don't Stop Me Now: The Impact of Credit Market Fragmentation on Firms' Financing Constraints
43 Pages Posted: 17 Mar 2017
Date Written: March 9, 2017
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 has increased. This result is mainly driven by the interbank channel, which plays a crucial role in transmitting shocks to the real sector across borders.
Keywords: International banking, firm finance, credit constraints
JEL Classification: F34, F36, G15, G21
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