Small Firms and Domestic Bank Dependence in Europe’s Great Recession

University of Zurich, Department of Economics, Working Paper No. 397

62 Pages Posted: 12 Oct 2021

See all articles by Mathias Hoffmann

Mathias Hoffmann

University of Zurich

Egor Maslov

Swiss Finance Institute; University of Zurich

Bent E. Sørensen

University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 06, 2021

Abstract

After the inception of the euro, the real economy in most member countries remained dependent on credit by domestic banks, which increasingly funded themselves through cross-border interbank funding. We find that this pattern of ‘double-decker’ banking integration exposed domestic banks to sharp declines in cross-border interbank lending during the eurozone crisis. As a result, domestic banks reduced lending which led to large declines in output in sectors with many small (bank-dependent) firms. We propose a quantitative small open economy model to account for these patterns and conclude that a global banking shock leading to a sudden stop in cross-border interbank lending in the eurozone is required to account for them.

Keywords: Small and medium enterprises, sme access to finance, banking integration, domestic bank dependence, interbank dependence, international transmission, eurozone crisis

JEL Classification: F30, F36, F40, F45

Suggested Citation

Hoffmann, Mathias and Maslov, Egor and Sorensen, Bent E., Small Firms and Domestic Bank Dependence in Europe’s Great Recession (October 06, 2021). University of Zurich, Department of Economics, Working Paper No. 397, Available at SSRN: https://ssrn.com/abstract=3941245 or http://dx.doi.org/10.2139/ssrn.3941245

Mathias Hoffmann (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Egor Maslov

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Bent E. Sorensen

University of Houston - Department of Economics ( email )

204 McElhinney Hall
Houston, TX 77204-5882
United States
713-743-3841 (Phone)
713-743-3798 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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