Bank Competition and Firm Access to Credit: Bank-Firm Level Evidence from Europe

Abstract

We examine the impact of bank competition on firms' access to credit using a large panel of 900 banks matched to almost 60.000 firms across the euro area over the period 2010-2016. Results provide empirical support for the market power hypothesis whereby low inter-bank competition worsens firms' credit conditions. Specifically, we find that higher bank market power is associated with lower short and long-term bank credit, higher reliance on trade credit and higher funding costs for corporate borrowers. Furthermore, the effect of bank competition is heterogeneous across firms and banks. On the one hand, high bank market power is especially detrimental for small and opaque firms, suggesting that low competition exacerbates the financial constraint of borrowers most exposed to information problems. On the other hand, the reduction in credit availability associated with high market power is attenuated for firms that borrow from small and local community banks, a finding consistent with the information hypothesis, whereby low competition increases banks’ incentive to supply relationship loans. On balance, however, the predominance of medium-large commercial banks in our sample determines that the overall effect of low inter-bank competition on credit conditions is unequivocally adverse for most firms, i.e. the market power effect outweighs the information effect. This evidence contributes to previous research on bank competition, firms’ credit constraint and relationship lending, and has implications for competition policy. Indeed, with respect to the prospect of greater banking consolidation in the European Union, our results suggest that considerations of efficiency and financial stability should be weighed against the potential negative consequences in terms of firms’ access to credit.

Keywords: Bank competition, Access to finance, Market power, Credit constraint

JEL Classification: G21, G32, L11