SME lending and competition: an international comparison ...

BIS RESEARCH PAPER NO. 270

SME lending and competition: an international comparison of markets

MAY 2016

1

Prepared by: INSTITUTE FOR EMPLOYMENT STUDIES City Gate 185 Dyke Road Brighton BN3 1TL UK Tel: + 44 (0) 1273 763400 Fax: + 44 (0) 1273 763401 employment-studies.co.uk

2

Acknowledgements The Institute for Employment Studies

The Institute for Employment Studies (IES) is an independent, apolitical, international centre of research and consultancy in public employment policy and organisational human resource issues. It works closely with employers in the manufacturing, service and public sectors, government departments, agencies, and professional and employee bodies. For over 40 years the Institute has been a focus of knowledge and practical experience in employment and training policy, the operation of labour markets, and human resource planning and development. IES is a not-for-profit organisation which has over 30 multidisciplinary staff and a network of international associates. IES expertise is available to all organisations through research, consultancy, publications and the Internet. For further details please visit: employment-studies.co.uk

3

Contents

Acknowledgements ..................................................................................................................... 3 The Institute for Employment Studies.......................................................................................... 3 Contents ........................................................................................................................................ 4 Glossary ........................................................................................................................................ 9 Executive Summary .................................................................................................................... 13 Background............................................................................................................................... 13 Approach .................................................................................................................................. 14 Findings .................................................................................................................................... 14

The UK market ...................................................................................................................... 14 Cross-country comparison .................................................................................................... 15 Conclusions and implications of the research........................................................................ 17 Assessing the feasibility of a study on the impact of competition on SME lending ..................... 18 1 Introduction ......................................................................................................................... 19 1.1 Defining SMEs ................................................................................................................ 20 1.2 Structure of report ........................................................................................................... 20 2 SME bank lending in the UK ............................................................................................... 22 2.1 Market analysis............................................................................................................... 22 2.2 Economic models of competition .................................................................................... 22 2.3 The empirical evidence on the UK market for bank lending to SMEs .............................. 24 2.3.1 Number of firms ....................................................................................................... 24 2.3.2 Barriers to entry ....................................................................................................... 25 2.3.3 Product differentiation .............................................................................................. 26 2.3.4 Market Power .......................................................................................................... 27

4

2.3.5 Conclusion on market structure ............................................................................... 27 2.4 Analysis of the competitive structure of the UK market for SME lending ......................... 27

2.4.1 Theoretical context .................................................................................................. 27 2.4.2 Empirical evidence................................................................................................... 30 2.4.3 Summary of findings ................................................................................................ 36 3 Historical context of the UK bank lending market ............................................................ 37 3.1 Developments in the UK bank lending market ................................................................ 37 3.2 Growth of the banking sector .......................................................................................... 39 3.3 Evolution of banking sector regulation ............................................................................ 39 3.4 Concentration of the UK bank lender sector.................................................................... 40 3.5 Summary ........................................................................................................................ 41 4 Review of SME Bank Lending in Germany ........................................................................ 43 4.1 The role of SMEs in the German economy ..................................................................... 43 4.2 Access to finance............................................................................................................ 46 4.3 SME bank lending........................................................................................................... 48 4.3.1 Historical context ..................................................................................................... 48 4.3.2 Market structure....................................................................................................... 51 4.3.3 Serving the needs of SMEs ..................................................................................... 53 4.4 Government intervention................................................................................................. 58 5 Review of SME Bank Lending in Italy ................................................................................ 60 5.1 The role of SMEs in the Italian economy......................................................................... 60 5.2 Access to finance............................................................................................................ 62 5.3 SME bank lending........................................................................................................... 63 5.3.1 Historical context ..................................................................................................... 63 5.3.2 Market structure....................................................................................................... 66

5

5.3.3 Serving the needs of SMEs ..................................................................................... 67 5.4 Government intervention................................................................................................. 72 6 Review of SME Bank Lending in theUSA .......................................................................... 74 6.1 Practical considerations for the analysis of the US market .............................................. 74 6.2 The role of SMEs in the US economy ............................................................................. 75 6.3 Access to finance............................................................................................................ 75 6.4 SME bank lending........................................................................................................... 78

6.4.1 Historic context ........................................................................................................ 78 6.4.2 Structure of the bank sector in the USA ................................................................... 80 6.4.3 Lending to SMEs ..................................................................................................... 82 6.5 Government intervention................................................................................................. 85 6.5.1 Community Development Financial Institutions Fund (CDFI) ................................... 86 6.5.2 Federal government interventions after 2008/09 ...................................................... 87 7 Cross-country analysis....................................................................................................... 88 7.1 Outcomes of the SME bank lending market .................................................................... 88 7.2 Evidence on cross-country differences in market outcomes............................................ 89 7.2.1 The amount of finance obtained relative to what is sought....................................... 89 7.2.2 Conditions associated with bank lending ................................................................. 95 7.2.3 Additional lending related services........................................................................... 97 7.2.4 The impact of market outcomes on SMEs................................................................ 98 7.2.5 Summary ............................................................................................................... 100 7.3 Interpreting the evidence on market outcomes.............................................................. 101 7.3.1 Impact of data limitations ....................................................................................... 101 7.3.2 Key market differences and link with observed market outcomes .......................... 102 7.4 Summary of findings ..................................................................................................... 106

6

7.4.1 Policy lessons for the UK ....................................................................................... 107 8 Feasibility study on the impact of competition on SME bank lending .......................... 110

8.1 Research aims.............................................................................................................. 110 8.2 Existing literature .......................................................................................................... 110 8.3 Data requirements of the study ..................................................................................... 111 8.4 Quantitative methodology ............................................................................................. 114

8.4.1 Discrete choice models.......................................................................................... 114 8.4.2 Switching - price models ........................................................................................ 114 8.4.3 Lending access - competition models .................................................................... 115 8.4.4 Loan price ? competition models ........................................................................... 115 8.4.5 Credit rationing tests .............................................................................................. 115 8.4.6 Bank switching models .......................................................................................... 116 8.4.7 The feasibility of these models............................................................................... 117 8.5 Summary and recommendations .................................................................................. 117 Bibliography.............................................................................................................................. 119 9 Appendix 1: Interpreting the evidence on market outcomes ......................................... 127 9.1 Limitations on the analysis ............................................................................................ 127 9.2 Differences in SME characteristics................................................................................ 128 9.2.1 Evidence on SME profiles ...................................................................................... 128 9.2.2 Impact of age and firm size on SME demand for finance ....................................... 129 9.2.3 Impact of age and firm size on the supply of finance to SMEs ............................... 129 9.3 The broad SME financing landscape ............................................................................ 130 9.3.1 Banking market structure ....................................................................................... 132 9.3.2 Market concentration ............................................................................................. 133 9.3.3 Models of bank lending .......................................................................................... 134

7

10 Appendix 2: Policy and regulatory time-lines (up to 2010) ............................................ 137 Germany ................................................................................................................................. 137 Italy ......................................................................................................................................... 139 USA ........................................................................................................................................ 141

11 Appendix 3: Relationship and transactional models of banking ................................... 143

8

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download