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The impact of the financial crisis on bank structure and firm financing

Among the most important consequences of the financial crisis has been the possible credit crunch caused by the contraction of banks' capital and the adverse liquidity shock in the interbank market. An EU-funded project investigated these consequences, looking at the supply of credit to firms in non-financial sectors.
The impact of the financial crisis on bank structure and firm financing
The EU-funded project MARKET STRUCTURE (Banking market structure and firms financing in financial turmoil) studied the relations between the banking market structures, such as a bank's headquarters location, efficiency and the board of directors, and the credit conditions for non-financial firms. They compared the German, French and Italian banking systems during financial turmoil, disentangling the effects of specific characteristics of financial markets at local market level.

Furthermore, researchers separated the factors that are possibly leading to differences in the credit constrain strictness towards different types of firms, regarding their economic performance.

MARKET STRUCTURE concentrated on three focal points: geographical distance between the bank and the borrower, the organisational structure of banks and the regional structure of the banking market. Furthermore, the team investigated differences in credit-supply between innovating and non-innovating firms, the effect of public funding on research and development (R&D) activities on firms, and the role of knowledge transfer.

Concerning geographical distance, the combination of local knowledge and soft information creates an effective barrier against competition from local banks. Recent developments in the banking industry, however, have led to the contestation of local credit markets by national and interregional transaction banks that use automated technologies to underwrite loans at a lower rate.

Competition between local and transaction banks may limit the ability of the first to charge high interest rates and so, some marginally profitable projects are consequently rejected. Collateral helps reduce this inefficiency and make lending to some marginable borrowers feasible.

With respect to organisational structure of banks, findings show that the allocation of decision-making authority within a bank's hierarchy has important implications for the provision of credit to firms. This is closely related to the existence of agency problems within the banking authority versus a possible loss of control.

Regarding the local structure of the banking market, researchers concluded that borrower proximity, the organisational structure of the banks and the banking market structure represent a relevant aspect for the provision of credit to firms.

Finally, the project team studied the role of R&D as a signal to lenders and the effects of public R&D funding. Overall, results partially confirm theoretical arguments claiming that it is more difficult for innovative firms to obtain credit. Furthermore, they indicate that the measure granting individual research successfully stimulated outcome variables related to R&D inputs of subsidised firms.

Related information


Financial crisis, bank structure, firm financing, MARKET STRUCTURE, financial turmoil
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