Discussion paper

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

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.

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Citation

Hoffmann, M, E Maslov and B Sørensen (eds) (2019), “DP13691 Small Firms and Domestic Bank Dependence in Europe's Great Recession”, CEPR Press Discussion Paper No. 13691. https://cepr.org/publications/dp13691-0