Heterogeneity and state dependence in firms’ access to bank credit

Abstract: This paper investigates firms’ access to bank credit in eleven euro area countries over the periods 2014–2019. Exploiting firm-level longitudinal data, we analyse loan demand and credit rationing probabilities, accounting for sample selection, unobserved heterogeneity and state dependence. Empirical results show that small and informationally opaque businesses, with deteriorated public support and credit history, face greater difficulties in obtaining bank loans. Furthermore, we provide evidence of a significant degree of state dependence in access to credit. In particular, firms that have already experienced credit restrictions are more likely to face further constraints, while enterprises that applied for bank financing in the past seem to have easier access to credit. Focusing on the subset of firms actually needing additional bank financing, we also find that past credit restrictions significantly reduce their current demand, providing evidence of a significant discouragement effect. Access to bank credit is a key driver of firms’ survival and growth, especially in bank-based financial systems. Building on detailed longitudinal survey data, this study investigates the determinants of access to bank financing by firms in the euro area, both in a static and dynamic setting. Most importantly, we account for the intertemporal nature of firms’ loan demand behaviour and banks’ credit granting choices and show that they are both characterized by significant persistence over time. We also find that repeated lending interactions enhance access to credit and that firms needing additional financing tend to be discouraged from applying after having experienced an actual credit restriction. Our findings shed light on the existence of substantial and persistent financial frictions in banking markets, which play a key role in amplifying adverse economic shocks, and call for policy and regulatory interventions to improve firms’ access to credit and limit systemic vulnerabilities.