SMEs’ growth under financing constraints and banking markets integration in the euro area

We explore the impact of financing constraints and the role of banking markets integration on the growth of small and medium enterprises (SMEs). The data are drawn from the European Central Bank/Survey on the Access to Finance of Enterprises (ECB/SAFE) on SMEs’ access to finance aggregated at the country level for the largest 11 euro area countries during 2009–2015. Our findings suggest that financing constraints hamper SMEs’ growth and that the effect is stronger for perceived, rather than actual, financing constraints. On the other hand, increased banking markets integration in the euro area appears to foster SMEs’ growth. Furthermore, we found that the reduction in financing constraints is crucial in the transmission channel from banking markets integration to growth. This effect appears significantly stronger when integration is measured by the intensity of cross-border lending than through convergence in interest rates to loans to nonfinancial corporations.