Manufacturing & Supply Chain

During Euro Crisis, Finance Costs Increased Disproportionately for Small Enterprises

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During Euro Crisis, Finance Costs Increased Disproportionately for Small Enterprises

December 08
14:41 2016
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Credit: Doyler79

Photo credit: Doyler79

A research technical paper published by the Central Bank of Ireland on Monday, shows that the cost of bank finance “increased disproportionately for smaller enterprises” during the euro crisis.

The paper, written by Sarah Holton and Fergal McCann, showed that banks with a greater market share were more likely to pass on greater interest rate increases to smaller enterprise borrowers and that the spread between small and large loans became particularly elevated at the height of the euro crisis.

The paper notes that this spread is “a particularly relevant concern” for monetary policy as smaller firms tend to rely on bank finance and have fewer external financing choices compared to larger firms.

The research, based on monthly bank panel data from twelve euro area countries from 2007 to 2015, focused on the difference between interest rates charged on small and large loans by the same bank, in the same country one the same month. The data revealed that bank market power, sovereign bond holdings and balance sheet weaknesses lead to disproportionate borrowing cost increases for small firms, and that these features acted to exacerbate the impact of a weak macroeconomy.

The researchers noted that bank balance sheet strength was particularly important for access to finance for small firms, partly because loans constitute a relatively higher share of their external financing, but also because banks can extract greater revenue from these dependent borrowers. Banks with characteristics that capture impaired funding and capital positions indeed charge smaller firms disproportionately higher interest rates.

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