Working Paper: CEPR ID: DP13691
Authors: Mathias Hoffmann; Egor Maslov; Bent E. Sørensen
Abstract: After the inception of the euro, the real economy in most member countriesremained dependent on credit by domestic banks, which increasinglyfunded themselves through cross-border interbank funding. We findthat this pattern of `double-decker' banking integration exposed domesticbanks to sharp declines in cross-border interbank lending during theeurozone crisis. As a result, domestic banks reduced lending whichled to large declines in output in sectors with many small (bank-dependent)firms. We propose a quantitative small open economy model to accountfor these patterns and conclude that a global banking shock leadingto a sudden stop in cross-border interbank lending in the eurozoneis required to account for them.
Keywords: Small and Medium Enterprises (SME); Access to Finance; Banking Integration; Domestic Bank Dependence; Interbank Dependence; International Transmission; Eurozone Crisis
JEL Codes: F30; F36; F40; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global banking shock (F65) | Domestic banks' lending capacity (G21) |
| Domestic banks' lending capacity (G21) | Output in SME-intensive sectors (E69) |
| Global banking shock (F65) | Output in SME-intensive sectors (E69) |
| Decline in cross-border interbank lending (F65) | Domestic banks' lending capacity (G21) |
| Domestic banks' reliance on interbank funding (F65) | Domestic banks' lending capacity (G21) |