Bank Relationships and Small-Business Closures during the Finnish Recession of the 1990s
The paper examines the role of bank relationships in business closures during the Finnish economic crisis of the early 1990s. We utilise a unique panel data set of 474 small and medium-sized firms, for which we have standard accounting information and for which we can in addition identify whether the firm had a lending relationship with the most troubled part of the banking system, namely the Savings Bank of Finland and Skopbank. By estimating a logit model we find that, even accounting for the effects of liquidity, profitability, indebtedness, age and size, firms that had a lending relationship with the savings banks concerned were more likely to close in 1992 than other firms that year or the same firms in other years. Thus being a loan customer of these banks entailed greater risk for firms than having a lending relationship with other intermediaries only in 1992, which was the year the banking sector came to a head. The result lends support to the hypothesis that financial factors affect real outcomes not only through firm and household balance sheets but also through bank behaviour. Introduction: The recent financial crises in Japan and elsewhere in Asia have once again highlighted the role of financial intermediation in macroeconomics. A widely held view is that frictions in financial intermediation tend to increase in times of general economic downturn and that these frictions contribute to a further decline in economic activity by leading to reduced spending and business closures.Theoretical literature identifies two mechanisms through which financial intermediation may affect real outcomes, ie production and employment. The first can be called a balance sheet mechanism and the second a (bank) lending mechanism. Both of them are associated with problems created by asymmetric information between providers of external funding and those making use of such funding; see for example Holmström and Tirole (1997) and Bernanke, Gertler and Gilchrist (1998).
Author: Helvi Kinnunen, Vesa Vihriälä
Source: Research Discussion Papers, Bank of Finland
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