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The Small Firm Financing Premium in Europe: Where and When Do Small Firms Pay the Most?

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Access to Bank Credit and SME Financing

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Abstract

A key feature of the recent European crisis has been a sharp divergence in financing conditions for small and medium enterprises (SMEs) across countries. We document the evolution of the interest rate differential on loans below and above €1 million—the Small Firm Financing Premium (SFFP)—across banks and countries. A clear bifurcation in the SFFP between stressed and non-stressed economies, beginning in late 2010, is highlighted. At the bank level, we show that banks with higher domestic market shares charge higher SFFP, with this relationship being particularly strong in Spain, Italy and France, but non-existent in Germany. Strong evidence of a “bank lending channel” is provided, with increases in banks’ non-performing loan (NPL) and credit default swap (CDS) spreads being associated with increases in the SFFP.

JEL Codes: G21, G30

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Notes

  1. 1.

    See Holton et al. (2013) and (2014) for evidence of divergence in credit access for SMEs during the euro area financial crisis.

  2. 2.

    Past literature highlights these factors which tend to make SME loans riskier than larger corporate loans [see, for instance, Saurina and Trucharte (2004), Dietsch and Petey (2002) and Altman and Sabato (2013)].

  3. 3.

    This is referred to as a ‘multiplier’ effect by Banerjee and Duflo (2010).

  4. 4.

    See ‘The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses’, OECD report, 2009.

  5. 5.

    In this chapter, stressed countries are defined as Greece, Ireland, Italy, Portugal, Slovenia and Spain.

  6. 6.

    Even in stable times, differences in economic and banking structures across countries—including regulatory and fiscal regulations, collateral policies, non-interest expenses, maturity and market structure—can lead to natural and expected differences in interest rate pricing (ECB 2006).

  7. 7.

    For a base interest rate ranging from 3 to 11%.

  8. 8.

    For an overview of the bank lending channel, see Bernanke and Gertler (1995) and Gertler and Kiyotaki (2011).

  9. 9.

    Santos (2011) and Balduzzi et al. (2013).

  10. 10.

    See the Box in ECB Monthly Bulletin, July 2013 entitled: ‘Small and Medium-Sized Enterprises in the Euro Area: Economic Importance and Financing Conditions’.

  11. 11.

    The shape of the distribution reflects the effect of winsorizing the 1% tails.

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Author information

Authors and Affiliations

  1. Monetary Analysis Division, European Central Bank, Frankfurt, Germany

    Sarah Holton

  2. Financial Stability Division, Central Bank of Ireland, Dublin, Ireland

    Fergal McCann

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  1. Sarah Holton
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  2. Fergal McCann
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Correspondence to Fergal McCann .

Editor information

Editors and Affiliations

  1. Department of Economics and Business, University of Cagliari, Cagliari, Italy

    Stefania Rossi

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Holton, S., McCann, F. (2017). The Small Firm Financing Premium in Europe: Where and When Do Small Firms Pay the Most?. In: Rossi, S. (eds) Access to Bank Credit and SME Financing. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-41363-1_5

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  • DOI: https://doi.org/10.1007/978-3-319-41363-1_5

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-41362-4

  • Online ISBN: 978-3-319-41363-1

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