ECB unconventional monetary policy and SME access to finance

Abstract

Small- and medium-sized enterprises (SMEs) account for two-thirds of employment in the euro area which makes them a priority for the transmission of monetary policy to the real economy. SMEs in Europe experienced a credit crunch following the sovereign debt crisis. Over the period 2014–2019, the European Central Bank (ECB) engaged in unconventional monetary policy (UMP) to restore funding conditions in the euro area, to support stronger economic growth and higher inflation. We use the ECB/EC Survey on the Access to Finance of Enterprises to examine the relationship between monetary policy and SME access to finance in countries that were most affected by the crisis as follows: Greece, Ireland, Italy, Portugal and Spain. We show that the implementation of UMP increases the probability that firms with higher debt-to-assets ratio remain credit constrained in stressed countries, although this effect becomes insignificant in non-stressed countries. Our findings suggest that monetary policy is transmitted unevenly to leveraged SMEs across jurisdictions. Additionally, we find little evidence that risky firms are credit constrained during periods of UMP, when risk is measured from the firms’ own viewpoint. However, our heterogenous analysis shows that smaller and younger firms—which are also considered to be risky—remain credit constrained over this period. Policy should ensure that UMP trickles down to SMEs regardless of their size, age or location. Tweetable line: Leveraged SMEs in stressed countries are more likely to remain credit constrained even when monetary policy is expansionary. Policy must do more to support small and young firms’ access to credit to facilitate higher investment and growth.

The Casualty Evidence for Interest Rates and SME’s Outputs Relation from A Developing Economy

“…Depending on the different countries and analyses applied, the evidence presents mixed results. Finnegan and Kapoor (2023) showed a link between monetary policy and SMEs' finance in Greece, Ireland, Italy, Portugal, and Spain, and confirmed that in stressed (non-stressed) countries, monetary policy significant (insignificant) raises the likelihood that SMEs with higher debt remain credit conditioned. They find that because risky firms are creditconstrained, monetary policy is unevenly diffused to leveraged SMEs.…”

“…However, some studies consider the influence of fiscal policies to stimulate SMEs' performance (Zhang and Wang, 2023). Further, many studies, including Ferrando et al (2019), Moreira et al (2016), Fu and Liu (2015), Fasano and La Rocca (2023), Finnegan and Kapoor (2023), found a link between monetary policy to SMEs. Zhang and Wang (2023) reported how the Chinese government policies over the years influence SMEs and other businesses.…”

“…Many problems are faced by the SMEs, these include the lack of a steady power supply, lack of finance, poor technology, and others. In ensuring that the SMEs are well funded and overcome some of these difficulties, many governments use different policies, especially monetary policy to aid their operations (Andreeva, & García-Posada, 2021;European Commission, 2022;Finnegan & Kapoor, 2023). In Nigeria, the CBN reports that only 5 percent of SMEs have access to adequate finance covering their working capital and that about N617.3 billion financing gap is required for the SMEs each year.…”

Does the bank-firm human relationship still matter for SMEs? The game-changing role of digitalization

“…SMEs need human bankers, and personal contacts cannot be fully replaced by digitalization. For instance, the discretion of a loan officer can hardly be substituted by digitalization, and this is particularly important for informationally opaque SMEs, whose access to external finance is very important (Finnegan & Kapoor, 2023). Thus, a key implication of our findings is that the importance of bank-firm geographical closeness is changing, which means that in the near future, banking institutions will have to rethink their business models in light of the ongoing growth of digitization.…”

Perceived Risk and External Finance Usage in Small- and Medium-Sized Enterprises: Unveiling the Moderating Influence of Business Age

“…Mateev et al (2013) identified a significant correlation between BAge and SMEs' preference for specific finance sources. Additionally, Wignaraja and Jinjarak (2015) found a positive association between an SME's BAge and the utilization of bank loans, while Mohamed Zabri et al (2021) and Finnegan and Kapoor (2023) concluded that a negative relationship exists between an SME's BAge and reliance on debt as a source of external finance. Numerous researchers have also extensively examined the association between enterprise age and business risks (Nguyen and Vo 2020).…”