DP13691 Small Firms and Domestic Bank Dependence in Europe's Great Recession

Author(s): Mathias Hoffmann, Egor Maslov, Bent E Sørensen
Publication Date: April 2019
Date Revised: October 2021
Keyword(s): Banking integration, domestic bank dependence, eurozone crisis, interbank dependence, International Transmission, Small and medium enterprises, sme access to finance
JEL(s): F30, F36, F40, F45
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13691

After the inception of the euro, the real economy in most member countries remained dependent on credit by domestic banks, which increasingly funded themselves through cross-border interbank funding. We find that this pattern of `double-decker' banking integration exposed domestic banks to sharp declines in cross-border interbank lending during the eurozone crisis. As a result, domestic banks reduced lending which led to large declines in output in sectors with many small (bank-dependent) firms. We propose a quantitative small open economy model to account for these patterns and conclude that a global banking shock leading to a sudden stop in cross-border interbank lending in the eurozone is required to account for them.