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
There are 2 versions of this paper
Small Firms and Domestic Bank Dependence in Europe’s Great Recession
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: Suggested Citation