Discussion paper

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

Abstract Small businesses (SMEs) depend on banks for credit. We show that the severity of the Eurozone crisis was worse in countries that borrowed more from domestic banks (``domestic bank dependence'') compared with countries that borrowed more from international banks. Eurozone banking integration in the years 2000-2008 involved cross-border lending between banks while foreign banks' lending to the real sector stayed flat. Hence, SMEs remained dependent on domestic banks and were vulnerable to global banking sector shocks. We confirm, using a calibrated quantitative model, that domestic bank dependence makes sectors and countries with many SMEs vulnerable to global banking shocks.

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Citation

Sørensen, B, M Hoffmann and E Maslov (eds) (2019), “DP13691 Small Firms and Domestic Bank Dependence in Europe's Great Recession”, CEPR Press Discussion Paper No. 13691. https://cepr.org/publications/dp13691