Access to Bank Credit and SME Financing

352 Pages·2017·6.645 MB·English

by  Stefania Rossi (eds.)

PALGRAVE MACMILLAN STUDIES IN
BANKING AND FINANCIAL INSTITUTIONS
SERIES EDITOR: PHILIP MOLYNEUX
Access to Bank Credit
and SME Financing
Edited by
Stefania Patrizia Sonia Rossi
Palgrave Macmillan Studies in Banking and
Financial Institutions
Series Editor
Philip Molyneux
Bangor University
United Kingdom
Aim of the series
The Palgrave Macmillan Studies in Banking and Financial Institutions
series is international in orientation and includes studies of banking sys-
tems in particular countries or regions as well as contemporary themes
such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions,
Risk Management, and IT in Banking. The books focus on research and
practice and include up to date and innovative studies that cover issues
which impact banking systems globally.
More information about this series at
http://www.springer.com/series/14678
Stefania Patrizia Sonia Rossi
Editor
Access to Bank Credit
and SME Financing
Editor
Stefania Patrizia Sonia Rossi
Department of Economics and Business
University of Cagliari
Italy
Palgrave Macmillan Studies in Banking and Financial Institutions
ISBN 978-3-319-41362-4 ISBN 978-3-319-41363-1 (eBook)
DOI 10.1007/978-3-319-41363-1
Library of Congress Control Number: 2016957875
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Stefania
Foreword
Following the global financial and European sovereign debt crises,
liquidity shortage and heavy restrictions on bank financing have worsened
conditions in credit markets for non-financial firms in Europe. Given
their importance as drivers of employment, growth, and innovation in
the European economy, easy access to credit becomes crucial especially
for small- and medium-sized enterprises (SMEs), which dominate
the business landscape in Europe and rely heavily on bank financing.
The difficulties in accessing and obtaining a bank loan appear even more
severe in the stressed countries that are struggling with the negative
consequences of the financial crisis due to their macroeconomic weaknesses
and financial fragility. Such distress increases the likelihood of credit crunch
phenomena—as banks tend to transfer the stress to the borrowers—which,
in turn, affect access and cost of funding for enterprises.
These issues were discussed by leading scholars in the field at the
international workshop ‘Access to Bank Credit and SME Financing’, held
in Pula, Sardinia, on 10 October 2015. This book collects some of the
papers presented at the workshop and is organised into two parts.
The first part, Credit Market Environment and SME Finance in Europe,
focuses on the issue of viability in credit access and on the financing
difficulties encountered by SMEs. It is widely accepted in the literature
that SMEs pay more for bank financing than larger firms because of
the SME’s peculiarities, such as higher observed default rates and more
vii
viii Foreword
exposure to idiosyncratic risk, stronger reliance on the domestic economy,
a narrower set of available financing options, intrinsic lack of ability to
produce high-quality collateral, and lack of transparency related to their
creditworthiness.
In addition to these features, the structure of the credit market,
the fragility of the banking system, the sovereign debt crisis, and the
social, institutional, and legal framework all seem to play a role, widely
recognized in the literature, in affecting SME access to credit.
The chapters collected in this part investigate the abovementioned
issues using different perspectives and methodological strategies and
provide state-of-the-art insight into SME financing in Europe.
It is worth noting that several studies included in this part of the book
rely on unique data provided by the ECB Survey on the Access to Finance
of Enterprises (SAFE), which, since 2009, collects comparable, timely,
and frequent financial information about access to credit and financing
constraints experienced by firms as well as a series of firm characteristics
related to SMEs in the European Union.
The first chapter by Ferrando and Mavrakis examines the external
financing channels of non-financial firms, comparing SMEs and mid-
caps with large enterprises over the period 2009–2015. In particular, the
chapter offers an analysis of the non-bank funding available to SMEs
(i.e. grants/subsidized loans, trade credit, other loans, leasing, debt
securities, mezzanine financing, equity) and uses the SAFE data to assess
whether these alternative sources of funding are accessible to SMEs and
how their use differs across firms and countries. After demonstrating that
trade credit as an alternative to bank loans is the most common source of
funding for ‘credit constrained firms’, the authors highlight the different
pattern between constrained firms in stressed versus non-stressed countries.
The evidence shows that it is more difficult for constrained firms in
stressed countries to switch between sources of financing. Further, the
results show that large firms access various sources of financing more
easily, while the market-based funding is rarely accessible to SMEs.
In the second chapter, Moro, Maresch, Ferrando, and Barbar
investigate how the ability of banks to recover loans from borrowers
in financial distress affects the propensity of banks to supply credit as
well as the propensity of SMEs to apply for bank loans. Combining the
Foreword ix
SAFE data with data from the World Bank Doing Business dataset, the
evidence shows that while banks’ recovery rates seem to negatively affect
the firms’ decision to apply for credit, surprisingly, it does not affect the
banks’ decision to provide credit. Additionally, the study shows that
banks’ recovery rates play a different role depending on the country-level
macroeconomic context. The authors compare the economically weak
countries with the strong ones and find that high recovery rates affect
loan applications in the economically strong countries, and the banks’
decision to provide a loan in the weak countries.
In Chap. 3, Galli, Mascia, and Rossi combine two strands of the
literature: one that looks at the effects of legal-institutional factors and
one that focuses on the impact of social capital in the credit markets.
They shed light on the determinants of the cost of funding for SMEs in
the euro area. In particular, the authors’ goal is to verify whether features
such as the institutional and legal framework and the level of social capital
significantly affect the cost of funding for SMEs in the euro area. The
authors perform an empirical analysis based on a large sample of 22,295
firm-level observations from 2009 to 2013 for a sample of 11 euro area
countries, taken from the SAFE. Their findings show that a less efficient
judicial system as well as a higher degree of concentration in the banking
industry increases the cost of funding for SMEs. The cost of funding for
SMEs is, instead, reduced when the market share of cooperative banks
and the social capital are higher. Overall, the study supports the view that
a better institutional environment and a wider presence of social capital
produce positive externalities in the credit market.
The analysis carried out in Chap. 4 by Stefani and Vacca is rooted in
the literature on gender discrimination in the credit market. The authors
investigate whether the gender of the firm’s manager/owner affects the
access of small firms to credit. The credit constraint of non-financial firms
may, in general, be either due to rejection by the bank (lender), or due
to self-restraint from the borrower who decides not to apply for a loan,
fearing the lender’s rejection. Relying on a large sample of SMEs (SAFE
data) pertaining to the main euro area countries, the evidence shows that
firms with female leadership use smaller amounts and less heterogeneous
sources of external finance than their male counterparts. In addition, as
they anticipate a rejection by the lender, they self-restrain in applying to
x Foreword
bank loans more than male-led firms and experience a higher rejection rate.
However, the econometric analysis does not provide evidence that banks
are biased against female-led firms. Rather, the different patterns for female-
and male-led firms are largely explained by some endogenous characteristics
of female-led firms that structurally affect their credit constraint.
Chapter 5 focuses on the evolution of the cost of financing for SMEs
across banks and countries in the euro area over the period 2007–2015.
Using the interest rate differential on loans—the small firm financing
premium (SFFP)—Holton and McCann test whether smaller firms pay an
interest rate premium compared with larger firms when borrowing from
banks. Their findings show that there has been a divergence in financing
conditions across firm types; SMEs, compared with larger firms, have
experienced a disproportionate increase in borrowing costs and a decline
in access to credit. This deterioration has been particularly acute in stressed
economies: a clear bifurcation in the SFFP between stressed and non-
stressed economies in late 2010 emerges from the analysis. The authors
are also able to show that the increase in banks’ non- performing loan and
credit default swap (CDS) spreads is associated with the increased cost of
borrowing for SMEs as measured by the increase in the SFFP.
In Chap. 6, Mascia, Mattana, Rossi, and D’Aietti investigate the causal
relation between sovereign and bank credit risk in order to understand
whether increases in sovereign risk (measured via sovereign CDS spreads)
have an impact on the market perception of bank credit risk (measured
via banks’ CDS quotes). The contagion effect between stressed sovereigns
and the banking industry may be due to the exposure of domestic banks
to their own country’s public debt. Based on daily quotes from 24 banks,
pertaining to 7 euro-zone countries, for the period between 1 January
2010 and 27 May 2014, the chapter provides empirical evidence that
sovereign CDSs have played a relevant role during the sovereign debt
crisis in Europe, that is, the market perception about a country’s credit
risk significantly affected the evolution of banks’ CDSs. These findings
support the view that distressed banks, in response to the developments in
sovereign debt turmoil, reduce lending to the private sector and increase
the cost of funding for enterprises. This, in turn, penalises especially
the SMEs, which, as often shown in the literature, heavily rely on bank
financing.