Introduction
According to a recent report by the European Commission (2022b), SMEs account for 99.8% of the firms in Europe and about 65% of total employment. The onset of the global financial crisis led to several challenges for small and medium-sized enterprises (SMEs) in accessing funding, especially for stressed countries in Europe including Greece, Ireland, Italy, Portugal, and Spain (Acharya et al., 2018). The credit crunch led to disruption in SME business and investment activities followed by prolonged low economic growth and subdued inflation (Bongini et al., 2021). As a response to this, the European Central Bank (ECB) implemented expansionary monetary policy, that was rather unconventional, through tools such as forward guidance (FG), negative interest rate policy (NIRP), targeted long-term refinancing operations (TLTROs) and various asset purchase programmes (APPs).
The key question
Did the unconventional monetary policy (UMP) benefit the SMEs in improving their access to funding? More precisely, it is relevant to ask from a policy perspective about the impact that expansionary UMP has led to. Mostly, SMEs in Europe are bank dependent and hence it becomes even more important to explore this research question. To answer this question, we investigate the impact of UMP on SMEs in both stressed and non-stressed countries.[1] In particular, we assess whether implementation of UMP reduced the probability of highly leveraged and risky firms being credit constrained.
The results suggest that banks might be reluctant to extend credit to highly leveraged SMEs even in the presence of UMP as banks had already experienced a negative fallout in stressed countries from taking excessive risk prior to the financial crisis
The previous literature has so far focused on the transmission of monetary policy through the bank lending channel (Bernanke & Blinder, 1988; Kapoor & Peia, 2021). We contribute to the growing literature on the impact of UMP on firm financing decisions using a micro firm-based survey that was designed to measure loan demand. More so, instead of measuring risk through z-scores ((Jiménez et al., 2018; Peydró et al., 2021), bank write-offs to total loans (De Jonghe et al., 2020) or loan yield (Peydró et al., 2021), banks’ internal ratings on loans to businesses (Dell’ariccia et al., 2017, we use future predictor of risk, profit decreased in the previous 6 months as well as a selection of subjective measures of risk such as the firms’ own view if their credit history, own economic outlook or own capital has deteriorated in the previous 6 months and, finally, an activity-based measure of risk, i.e. innovative activity, given that such activity is more uncertain and, therefore, riskier.
We find that highly leveraged firms are more credit constrained in stressed countries as compared to SMEs in non-stressed countries. The results suggest that banks might be reluctant to extend credit to highly leveraged SMEs even in the presence of UMP as banks had already experienced a negative fallout in stressed countries from taking excessive risk prior to the financial crisis (Blanco and Jimenez, 2018; Corbisiero & Faccia, 2019; Fernández de Guevara et al., 2021). Finally, we do not find any evidence for risky firms being credit constrained or not during the implementation of UMP.
Relevance
There has been prolonged debate on the efficacy of unconventional policy tools. Our research helps to provide insights into the (in)ability of UMP to impact credit constraints for SMEs. This research is relevant even in times of post-pandemic and monetary policy tightening in an inflationary environment. The tapering of government supports post pandemic may result in a rise in credit demand over the coming months. In addition, the ECB has tightened monetary policy and signalled further tightening to grapple with high inflation (ECB, 2022a). Monetary policy will need to channel funds to those SMEs that survived the pandemic and can grow.
This article is available in Dutch. Full text of this paper is available here.
Footnotes
[1] Stressed countries are defined as countries with the highest average sovereign yields during the 2009–2012 period (Greece, Ireland, Italy, Portugal, and Spain), while non-stressed countries did not experience elevated average sovereign yields during the 2008–2013 period.
References
Acharya, V., Eisert, T., Eufinger, C., & Hirsch, C. (2018). Real effects of the sovereign debt crisis in Europe: Evidence from syndicated loans. The Review of Financial Studies, 31(8), 2855–2896.
Bernanke, B. and Blinder, A. (1988). Credit, money, and aggregate demand. American Economic Review, 78 (2), 435–39.
Blanco, r. and Jimenez, N. (2018). Credit allocation along the business cycle: Evidence from the latest boom bust credit cycle in Spain. Working Papers 1826, Banco de Espana.
Bongini, P., Ferrando, A., Rossi, E., & Rossolini, M. (2021). SME access to market-based finance across eurozone countries. Small Business Economics, 56(4), 1667–1697.
Corbisiero, G. and Faccia, D. (2019). Firms’ or banks’ weakness? Access to finance since the European sovereign debt crisis. Central Bank of Ireland Research Technical Paper, 2019, No. 12.
De Jonghe, O., Dewachter, H., Mulier, K., Ongena, S., & Schepens, G. (2020). Some borrowers are more equal than others: Bank funding shocks and credit reallocation. Review of Finance, 24(1), 1–43
Dell’ariccia, G., Laeven, L., & Suarez, G. (2017). Bank leverage and monetary policy’s risk-taking channel: Evidence from the United States. Journal of Finance, 72(2), 613–654.
ECB (2022a). Monetary policy decisions. Press Release, 22 July 2022a.
ECB (2022b). Survey on the access to finance of enterprises. Methodological information on the survey and user guide for the anonymised micro dataset. European Central Bank.
Fernández de Guevara, J., Maudos, J. and Salvador, C. (2021). Effects of the degree of financial constraint and excessive indebtedness on firms’ investment decisions. Journal of International Money and Finance, 110.
Finnegan, M., Kapoor, S. ECB unconventional monetary policy and SME access to finance. Small Bus Econ (2023). https://doi.org/10.1007/s11187-023-00730-0
Jiménez, G., Moral-Benito, E. and Vegas Sánchez, R. (2018). Bank lending standards over the cycle: The role of firms’
productivity and credit risk. Banco de Espana Working Paper No. 1811
Kapoor, S. and Peia, O. (2021). The impact of quantitative easing on liquidity creation. Journal of Banking & Finance, 122 (C).
Peydró, J.-L., Polo, A., & Sette, E. (2021). Monetary policy at work: Security and credit application registers evidence. Journal of Financial Economics, 140(3), 789–814.