Eurozone SMEs in the credit crisis. Sarah Holton, Martina Lawless & Fergal McCann Central Bank of Ireland Motivation ◮ The financial crisis affected the economy through an important channel: ◮ Stress in interbank market led to "credit crunch" in the real economy (IMF, 2009). ◮ High government debt and deficit levels led to tensions in euro area sovereign bond markets. ◮ Limited information on how this is affecting firms, in particular in terms of bank credit. ◮ Small firms generally found to rely on bank financing or informal sources. Also found to struggle to access bank financing more than larger firms. , , SMEs in the credit crisis., 04/11/2011 2 Research Question ◮ We combine firm-level data from a survey on access to finance carried out by the European Central Bank (ECB) with macroeconomic variables. ◮ Exploiting cross-country, cross- time variation in the extent of the crises in the real, financial and sovereign sectors allows us to observe their relative effects on SME financing. ◮ Examine the factors that are relevant for firms’ demand for credit and for the supply of finance. ◮ both financing experience and perception of constraints. ◮ terms and conditions. , , SMEs in the credit crisis., 04/11/2011 3 Contribution ◮ Extends on SME access to finance literature by adding the important connection between finance and the real economy ◮ "As the real costs of intermediation increased, some borrowers (especially... small firms) found credit expensive to obtain. The effects... a protracted depression" Bernanke (1983) ◮ accounting for important features of the bank lending channel ◮ "The bank lending channel is based on the view that banks play a special role in the financial system because they are especially well suited to deal with certain types of borrowers, especially small firms" Mishkin (1995) ◮ taking account of variables that are important for credit supply ◮ "sovereign bond markets, have traditionally come to play a distinct role in the transmission of monetary policy in all advanced economies. This occurs via three channels... price channel... liquidity channel... balance sheet channel." (Gonzalez-Paramo, 25th November 2011) ◮ and credit demand. ◮ "contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete". (Rogoff, 2011) , , SMEs in the credit crisis., 04/11/2011 4 Existing Literature - cross country ◮ Beck, Demirguc-Kunt, Laeven, Maksimovic (JIMF 2006): Older, larger foreign owned firms report less financing obstacles and institutional development is the most important country characteristic explaining cross country variation in financing obstacles ◮ Beck, DK, Maksimovic (JFE 2008): Better institutional/legal system promotes use of external finance. Small firms benefit disproportionately from stronger property rights protection (bank effect). ◮ Beck, DK, Maksimovic (JMCB 2004): bank concentration impedes access to finance, but only when development and institutions are weak. Foreign banks, efficient credit registry increase SME access to credit. More government interference and ownership in banking impedes access. , , SMEs in the credit crisis., 04/11/2011 5 Existing Literature - Eurozone ◮ Using the SAFE dataset: ◮ Ferrando and Griesshaber (2011): Firm age and ownership are the most robust predictors regarding the existence of financing obstacles, results are mixed for size and economic branch. ◮ Artola and Genre (2011): Perceptions of financing obstacles were broadly based across firms, but those that really suffered tended to be small and young, while certain countries suffered more than others. ◮ Both find country dummies are significant in all cases , , SMEs in the credit crisis., 04/11/2011 6 Theoretical underpinnings on firm size and age ◮ Berger and Udell (2002): Transactions-based versus Relationship lending. ◮ Transactions lending: mainly financial statements. Also credit scoring, asset-based lending, leasing. ◮ Smaller firms are more opaque - there is less publicly available information on small firms. ◮ Banks are posed with a higher risk when lending to such firms - tougher lending conditions are likely. ◮ If bank is basing decisions on assets - small firms are less likely to have large collateral. ◮ Relationship lending can require a big investment on the part of the bank - if SMEs rely more on relationship lending, they may suffer as a result. ◮ Problems of financial statements and assets are also pertinent for young firms. , , SMEs in the credit crisis., 04/11/2011 7 Economic importance of SME finance access ◮ SMEs account for 99% of firms, 70% of employment (Eurostat) ◮ Firms who are constrained in accessing credit have been found to have higher likelihood of: ◮ Exiting the market (Osotimehin and Pappada 2010) ◮ Decreasing investment and shedding temporary employment (Benito and Hernando 2002) ◮ Lower employment, tech spending, capital investment, marketing expenditure, dividend payments. Campello et al. (JFE 2010) , , SMEs in the credit crisis., 04/11/2011 8 Results Preview ◮ Smaller and younger firms more likely to have problems accessing bank credit. ◮ Country dummies highly significant in explaining credit demand and supply. ◮ We try to explain these country effects using GDP growth, industrial order book survey data, private sector debt to GDP and sovereign yields in probit regressions of firm finance access. ◮ Sovereign yields and debt overhang appear relevant and negative for firms’ actual experience in accessing credit, while GDP growth and order book levels are not as important in this respect. ◮ On demand, GDP changes and debt overhang appear to matter the most. ◮ For interest rates and loan size offered, debt overhang, bank risk and sovereign risk appear to affect SMEs’ access to credit. , , SMEs in the credit crisis., 04/11/2011 9 Dataset The ECB and European Commission survey on the access to finance of small to medium sized enterprizes provides information on: ◮ general charactertics ◮ firm class sizes and age ◮ branches of economic activity ◮ turnover and ownership ◮ general information on situation of the firm ◮ most pressing problem ◮ change in debt situation ◮ financing of the firm ◮ sources of finance ◮ demand, availability and applications for different sources of financing ◮ terms and conditions of bank financing ◮ future, growth and obstacles to growth ◮ availabilty of finance , , SMEs in the credit crisis., 04/11/2011 10 Sample size by survey round and country H12009 H22009 H12010 H22010 Total Austria 224 203 200 500 1,127 Belgium 220 202 203 517 1,142 Germany 1,003 1,001 1,000 1,000 4,004 Spain 1,012 1,004 1,000 1,000 4,016 Finland 111 100 100 500 811 France 1,000 1,001 1,003 1,004 4,008 Greece 220 200 200 500 1,120 Ireland 110 101 100 500 811 Italy 1,006 1,004 1,000 1,000 4,010 Netherlands 323 252 256 502 1,333 Portugal 327 252 250 509 1,338 Total 5,556 5,320 5,312 7,532 23,720 , , SMEs in the credit crisis., 04/11/2011 11 Composition of the survey across 4 waves , , SMEs in the credit crisis., 04/11/2011 12 Other characteristics across 4 waves , , SMEs in the credit crisis., 04/11/2011 13 Change in firms’ demand for bank loans in previous six months Increased Unchanged Decreased Total No. % No. % No. % No. % Austria 160 20.4 467 59.4 159 20.2 786 100 Belgium 159 18 570 64.7 152 17.3 881 100 Germany 604 21.3 1,656 58.5 572 20.2 2,832 100 Spain 815 24.9 1,822 55.8 630 19.3 3,267 100 Finland 108 17.8 367 60.4 133 21.9 608 100 France 646 17.9 2,426 67.4 527 14.6 3,599 100 Greece 239 29.7 414 51.4 152 18.9 805 100 Ireland 130 19.3 409 60.8 134 19.9 673 100 Italy 802 24.4 1,950 59.4 531 16.2 3,283 100 Netherlands 185 20.4 509 56.1 214 23.6 908 100 Portugal 193 22 521 59.3 164 18.7 878 100 Total 4,041 21.8 11,111 60 3,368 18.2 18,520 100 , , SMEs in the credit crisis., 04/11/2011 14 Perception: Change in availability of bank loans in previous 6 months Improved Unchanged Deteriorated Total No. % No. % No. % No. % Austria 81 11.8 442 64.6 161 23.5 684 100 Belgium 120 16.8 460 64.4 134 18.8 714 100 Germany 228 12.4 1,455 62.5 586 25.2 2,329 100 Spain 310 11.1 1,438 51.5 1045 37.4 2,793 100 Finland 104 22.2 315 67.2 50 10.7 469 100 France 354 13.4 1,730 65.7 549 20.9 2633 100 Greece 75 9.9 352 46.4 332 43.7 759 100 Ireland 20 3.5 276 48.7 271 47.8 567 100 Italy 361 13 1,725 62 695 25 2,781 100 Netherlands 102 13.2 417 53.9 255 32.9 774 100 Portugal 89 12.3 405 56.2 227 31.5 721 100 Total 1,844 12.1 9,015 59.2 4,305 28.3 15,224 100 , , SMEs in the credit crisis., 04/11/2011 15 Experience: Results of loan applications in previous 6 months Not rejected Rejected Total Country No. % No. % No. % Austria 206 80.2 51 19.8 257 100 Belgium 212 81.5 48 18.5 260 100 Germany 683 74.6 233 25.4 916 100 Spain 714 50.6 696 49.4 1,410 100 Finland 92 84.4 17 15.6 109 100 France 901 81.4 206 18.6 1,107 100 Greece 169 47.7 185 52.3 354 100 Ireland 54 44.3 68 55.7 122 100 Italy 896 67.8 426 32.2 1,322 100 Netherlands 89 53.6 77 46.4 166 100 Portugal 173 61.8 107 38.2 280 100 Total 4,189 66.5 2,114 33.5 6,303 100 , , SMEs in the credit crisis., 04/11/2011 16 Terms and conditions: Change in bank interest rates in previous 6 months Increased Unchanged Decreased Total No.