Do foreign banks intensify borrower discouragement? The role of developed European institutions in ameliorating SME financing constraints

Ana Mol-Gómez-Vázquez*, Ginés Hernández-Cánovas, Johanna Koëter-Kant

*Corresponding author for this work

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Abstract

The growing activity of foreign banks in most European countries may increase financing constraints by intensifying the problem of borrower discouragement. We provide new evidence of this association by analysing a sample of small and medium-sized enterprises (SMEs) operating in 25 developed and developing European countries. We find that financing constraints increase with foreign banks for those SMEs operating in countries where the share of banking assets owned by foreign banks is above 34%. Our results also show that borrower discouragement may decrease, or increase less, with the presence of foreign banks for SMEs operating in countries with high income, with cheap debt enforcement mechanisms, or having a private bureau that provides credit information about firms and individuals. These results suggest that unification towards better institutions needs to occur in Europe before the banking union progresses to a more open banking system.

Original languageEnglish
Pages (from-to)3-20
Number of pages18
JournalInternational Small Business Journal: Researching Entrepreneurship
Volume38
Issue number1
Early online date3 Aug 2019
DOIs
Publication statusPublished - Feb 2020

Funding

The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Ana Mol-G?mez-V?zquez and Gin?s Hern?ndez-C?novas acknowledge financial support by Santander Financial Institute (SANFI) and Fundaci?n UCEIF.

FundersFunder number
Fundación de la Universidad de Cantabria para el Estudio y la Investigación del Sector Financiero
Santander Financial Institute

    Keywords

    • borrower discouragement
    • financing constraints
    • foreign banks
    • institutional development
    • small business lending

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