Bank Market Power and SME Financing Constraints

Abstract

Theoretical models of lending and industrial organization theory predict that firm access to credit depends critically on bank market structure. However, empirical studies offer mixed results. Some studies find that higher concentration is associated with higher credit availability consistent with the information hypothesis that less competitive banks have more incentive to invest in soft information. Other empirical studies, however, find support for the market power hypothesis that credit rationing is higher in less competitive bank markets. This study tests these two competing hypotheses by employing for the first time a competition indicator from the Industrial Organization literature -the Lerner index -as an alternative to traditional measures of concentration. We test the information and the market power hypotheses using alternative measures and firm borrowing constraints. We find that the results are sensitive to the choice between IO margins and traditional concentration measures. In particular, the HHI seems to support the information hypothesis while the Lerner index supports the market power hypothesis. The Lerner index, however, is found to be a more consistent indicator of market power across different measures of financing constraints. Moreover, the Lerner index is found to exhibit the larger marginal effect on the probability that a firm is financially constrained among a large set of firm level, bank market and environmental control variables. Our results are robust to alternative measures of financial constraints and cast doubt on the validity of relying on concentration measures as proxies of competition in corporate lending relationships (247 words).

A more complete conceptual framework for SME finance

“…The empirical results are mixed, with some studies finding generally unfavorable effects from market power (e.g., Elsas, 2005;Karceski et al, 2005;Cetorelli and Strahan, 2006), and others finding favorable effects (e.g., Petersen and Rajan, 1995;Cetorelli and Gambera, 2001;Bonaccorsi di Patti and Dell'Ariccia, 2004;Cetorelli, 2004). 12 One study found that the results depend on how market power is measured with concentration measures and the Lerner index generally showing conflicting results (Carbó -Valverde et al, 2006).…”

Bank Concentration, Competition, and Financial Inclusion

“…Claessens and Laeven (2005) provides evidence for 16 countries that more competitive banking systems exert a positive effect on firms' access to finance. Carbo-Valverde et al (2009) shows that the effect of banking sector competition on Spanish firms' access to finance depends crucially on how competition is measured. Their results indicate a negative association between market power and access to finance when the Lerner index is used.…”

Credit rationing for Portuguese SMEs

“…These models assume that the credit market may be in disequilibrium and, therefore, the observed interest rate does not ensure that credit demand is equal to credit supply. Ogawa and Suzuki (2000), Atanasova and Wilson (2004), Shikimi (2005) and Carbo-Valverde et al (2009) estimated disequilibrium models to identify the presence of credit rationing in the economy. More recently, Kremp and Sevestre (2013) considered this methodology to analyze the determinants of credit demand and credit supply for French small and medium-sized enterprises (SMEs) and found that, even though banks adopted tighter standards in credit approval, French firms were not significantly affected by credit rationing, even after 2008.…”