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Small firms and domestic bank dependence in Europe’s Great Recession


Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E (2021). Small firms and domestic bank dependence in Europe’s Great Recession. Working paper series / Department of Economics 397, University of Zurich.

Abstract

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.

Abstract

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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:F30, F36, F40, F45
Uncontrolled Keywords:Small and medium enterprises, sme access to finance, banking integration, domestic bank dependence, interbank dependence, international transmission, eurozone crisis
Language:English
Date:October 2021
Deposited On:11 Oct 2021 17:32
Last Modified:13 Oct 2021 03:42
Series Name:Working paper series / Department of Economics
Number of Pages:60
ISSN:1664-705X
OA Status:Green
Official URL:https://www.econ.uzh.ch/de/research/publications/workingpapers.html?paper-id=1079

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