Sarah Holton

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.