Hybrid seminar: Bank Funding, SME Lending and Risk Taking

"We argue that a bank’s funding composition is associated to the riskiness of its SME lending. Analyzing loan growth for SMEs in eleven European countries, we find that SSM-supervised banks relying more on market funding and interbank lending (which includes central bank refinancing operations) exhibit lending to SMEs of lower creditworthiness. The association is strongest for banks relying on market funding and can be explained by debt instruments with longer initial maturity. Our findings are economically significant. A bank’s level of capitalization is not robustly associated to the riskiness of SME lending, suggesting that, while equity has loss absorbing capacity, it does not alter the riskiness of SME lending. We show that our results are largely robust to sample changes, changes in the timing of variables and to employing different measures proxying firms’ creditworthiness. We contribute by analyzing a comprehensive dataset in which we matched firms to their credit supplying banks, allowing us to study the transmission of bank funding at a granular level."