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Interest rates, corporate lending and growth in the Euro Area

Tondl, Gabriele (2016) Interest rates, corporate lending and growth in the Euro Area. Department of Economics Working Paper Series, 227. WU Vienna University of Economics and Business, Vienna.

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Abstract

The sluggish development of corporate lending has remained the central concern of EU monetary policy makers as it is considered to hinder seriously the resurgence of growth. This paper looks at the development of loans to large corporations vs SMEs in the pre-crisis and post-crisis period and wishes to answer: (i) to which extent do allocated loan volumes actually contribute to Output growth? (ii) which factors determine the development of loans, considering above all loan interest rates? and (iii) what causes differences in loan interest levels across the EA? The results indicate that different loan developments in the EA explain very well differences in output development, loans to SMEs contribute even more to output growth than those for large corporations. Loan development itself is negatively influenced by the interest level which differs significantly across EA members, with small loans in addition always being charged an interest premium over large loans. The capitalization of banks, the size of banks and their internationalization play a role as well. A part of the sluggish growth of loans can be explained by the increasing use of alternative financial instruments by large firms. Interest rates in turn are following the ECB interest rate, - but this link has become looser in the post-crisis period, and long term government bond rates. Different risks faced by banks and different bank structures have become important explanatories of interest rates in the post-crisis period. (author's abstract)

Item Type: Paper
Additional Information: The Paper was elaborated under the project "Business Cycles in Europe" financed by the Anniversary Fund of the Oesterreichische Nationalbank (project no.15798).
Keywords: Corporate lending / Credit market fragmentation / Interest pass-through / Bank lending rates / Finance and growth / Euro Area
Classification Codes: JEL E40, E43, E44
Divisions: Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 20 Jun 2016 14:25
Last Modified: 20 Jun 2016 14:37
URI: http://epub.wu.ac.at/id/eprint/5085

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