Financial fragmentation and SMEs’ access to finance

This paper focuses on the impact of financialfragmentation on small and medium enterprises’(SMEs) access to finance. We combine country-leveldata on financial fragmentation and the ECB’s SAFE(Survey on the Access to Finance of Enterprises) datafor 12 European Union (EU) countries over 2009–2016.Our findings indicate that an increase in financial fragmentationnot only raises the probability of all firms tobe rationed but also to be charged higher loan rates; inaddition, it increases the likelihood of borrower discouragementand it impairs firms’ perceptions of the futureavailability of bank funds. Less creditworthy firms areeven more likely to become credit rationed, suggesting aflight to quality effect in lending. However, our studyalso documents a potential adverse effect of increasingbank market power resulting from greater integration.This suggests that financial integration could impairfirms’ financing, if not accompanied by policyinitiatives aimed at maintaining an optimal level ofcompetition in the banking sector.