Bank competition, concentration and EU SME cost of debt

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    Abstract

    Despite the plentiful debate on the effects of bank competition on SME access to finance and growth, only few studies have explored the impacts on SME cost of debt. This study examines how bank market power affects the credit costs of SMEs by using unique matched SME-bank data from 17 EU countries. We show that bank market power reduces the cost of debt for SMEs. Such a favorable effect is stronger for SMEs that are less informationally transparent, and in the economies subject to less credit information depth and business extent of disclosure. These findings support the Information-based Hypothesis, whereby market power motivates banks to invest in soft information acquisition and to build lending relationships to reduce information costs. In addition, we show that despite the favorable effects of relationship lending brought by bank market power, SME credit conditions worsen in a more concentrated banking market.
    Original languageEnglish
    Article number101534
    Number of pages20
    JournalInternational Review of Financial Analysis
    Volume71
    Early online date11 Jun 2020
    DOIs
    Publication statusPublished - 1 Oct 2020

    Keywords

    • Bank market power
    • Cost of debt
    • EU countries
    • Financing constraints
    • SME

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