Fergal McCann

Firm credit in the euro area: a tale of three crises

Using survey data from 2009 to 2011, we analyse the effects of the recent euro area economic, financial and private debt crisis on the supply of and demand for bank finance for small and medium enterprises (SMEs). At the country level, we identify three distinct aspects of the recent crisis in the euro area affecting firm credit through different channels. Controlling for country fixed effects, the impact of a weak real economy on firm credit operates both by reducing firms’ demand for bank financing and by lenders increasing loan rejections and tightening terms and conditions on credit allocated. On the other hand, financial conditions have no significant effect on demand, but they do affect credit supply as we find that financial tensions worsen the chances of obtaining credit and its terms and conditions. We interpret this as evidence of a bank balance sheet channel negatively impacting credit provision. We find that private sector indebtedness has important effects on SMEs’ credit access and its terms and conditions.

SME Financing Conditions in Europe: Credit Crunch or Fundamentals?

Cross-country divergence in credit availability to Small and Medium Enterprises (SMEs) has been a salient feature of the recent Euro Area economic crisis. This paper uses firm level and macroeconomic data to identify heterogeneity in SME credit conditions within the Euro Area since 2009. By taking account of differences in firm quality and in the risk-free interest rate, we use remaining residual differences in credit supply conditions to identify a ‘credit crunch’. We investigate whether macroeconomic conditions such as real economy growth and private sector leverage can explain these residual credit crunches, finding that banks respond to these factors when allocating credit to SMEs. The analysis allows identification of economies where credit conditions appear both unexpectedly restrictive and accommodative.

SMEs in Ireland: contributions, credit and economic crisis

The small and medium enterprise (SME) segment is regarded as an important contributor to sustainable economic and employment recovery due to their largely indigenous, employment-intensive nature. The recent economic, financial and employment crisis has been particularly sharply felt in this segment of the Irish economy. Taking a wide range of indicators from firm production and bank lending data, this article examines the structure of the SME sector through the pre- and post-crisis period. This highlights the central contribution of SMEs to employment and job creation, with an emphasis on the role of indigenous, non-exporting firms. Descriptive evidence on the misallocation of credit in the run-up to the 2008 crisis, along with a reallocation of lending away from those sectors with highest pre-2008 credit accumulation is also presented.

Firm size, credit scoring accuracy and banks' production of soft information

Research on SME bank financing generally assumes that smaller firms are more opaque from a lender’s perspective. We propose that the discriminatory power of credit scoring models can be thought of as a proxy for firm opaqueness, given that when these models perform poorly, lenders must invest in the production of ‘soft information’ to supplement the financial data used in these models. Measuring the discriminatory power of probit default models across quintiles of the Irish SME size distribution, we show that our proxy for firm opaqueness increases monotonically as firms get smaller. This finding supports an assumption that is the starting point to a wide strand of literature on SME bank financing. Our findings can also be interpreted as providing an insight to the literature on the determinants of banks’ choice of lending technology. While smaller banks may, as found in a substantial previous literature, produce larger amounts of ‘soft information’ due to their organizational advantages, they may also do so out of necessity: hard-information-based default modelling is less effective among smaller firms, thereby forcing banks that lend to these borrowers to invest more in relationship banking technologies to retain competitiveness.

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

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.