The Effects of Bank Switching: Firm Level Evidence from Finnish Small and Micro Firms

Abstract

This paper investigates the impact that bank switching has on loan availability and credit terms of small and micro firms. We are able to separate between different reasons behind the bank switch. Our data includes firms which have undergone bank change after the failure of their main bank, after the merger of their main bank and voluntary, firm initiated bank switches. The results are ambiguous. On one hand we find that bank switching makes it more difficult for firms to obtain a loan. On the other hand we find that interest rate margins on loans are lower for the firms that have switched their main bank. Small firms are more likely to be financially constrained after any type of bank switch whereas this likelihood increases for the larger firms in the sample only after a voluntary bank switch. Interest rate margins are lower for the larger firms after a bank merger but increase for the smaller firms after a merger.

Keywords: Bank switch, loan availability, credit terms and small business

JEL Classification: G14, G21