Financial Frictions, Real Estate Collateral, and Small Firm Activity in Europe

72 Pages Posted: 11 Oct 2018

See all articles by Ryan Banerjee

Ryan Banerjee

Bank for International Settlements (BIS)

Kristian Blickle

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: October 2018

Abstract

We observe significant heterogeneity in the correlation between changes in house prices and the growth of small firms across certain countries in Europe. We find that, overall, the correlation is far greater in Southern Europe than in Northern Europe. Using a simple model, we show that this heterogeneity may relate to financial frictions in a country. We confirm the model’s propositions in a number of empirical analyses for the following countries in Northern and Southern Europe: the United Kingdom, Norway, France, Italy, Spain, and Portugal. Small firms in countries with higher financial frictions (for example, places where bankruptcy resolution is more difficult and/or takes longer) see a greater dependence on “stable” real estate collateral. This is most pronounced for opaque (for example, very young) firms. Through an extension to our model and our choice of specification, we show that our findings are most consistent with a collateral-value-based credit supply channel and rule out a consumer-driven demand effect.

Keywords: firm financing, real estate collateral, credit supply, bankruptcy laws, financial frictions

JEL Classification: G30, G33, K11, O47, R30

Suggested Citation

Banerjee, Ryan and Blickle, Kristian, Financial Frictions, Real Estate Collateral, and Small Firm Activity in Europe (October 2018). FRB of New York Staff Report No. 868, Available at SSRN: https://ssrn.com/abstract=3259924 or http://dx.doi.org/10.2139/ssrn.3259924

Ryan Banerjee

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Kristian Blickle (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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