Assessing the impact of the EIB's intermediated lending to SMEs during funding shocks

Plain English Summary Small firms' employment and investment activity can effectively be supported by public financial institutions' lending programmes through intermediary banks, particularly when these banks face funding constraints. In this paper, we examine the lending support provided by the European Investment Bank (EIB) on the performance of small- and medium-sized enterprises (SMEs) in the 28 member countries of the European Union between 2008 and 2014 - the Great Financial Crisis (GFC) and its aftermath. We find that access to EIB-supported loans had a positive effect on employment and investment of the beneficiary firms compared to a sample of similar firms without a link to an EIB-supported loan. This positive effect was stronger in those countries where banks heavily used interbank funding to finance their activities. We argue that reliance on interbank funding increases banks' exposure to funding shocks; thus, after the GFC, wholesale-funded banks curtailed credit supply to firms more than banks with stable funding. For wholesale-funded banks, the stable, long-term funding provided by the EIB appeared to be able to mitigate in part the impact of the shock on credit supply. This manifested in the better performance of the beneficiaries of the EIB-supported loans relative to other firms that faced tight credit supply. Overall, from a policy perspective, our findings give support to public sector intervention to SME credit markets in the form of intermediated lending, in particular after financial downturns that are associated with funding shocks to banks. We look at the impact of intermediated funding provided by the European Investment Bank (EIB) on the performance of small- and medium-sized enterprises (SMEs) in the European Union between 2008 and 2014 - the Great Financial Crisis (GFC) and its aftermath. We use a combination of propensity score matching and difference-in-differences to evaluate the impact of EIB-supported credit on corporate performance using firm-level data. We find that access to EIB-supported funding had a positive effect on employment and investment in beneficiary firms. This positive effect was stronger in those countries where banks have traditionally relied more strongly on non-core liabilities, such as interbank funding. All in all, our results indicate that EIB-supported funding made a significant and positive difference to the economic and financial performance of the beneficiary SMEs in the aftermath of the Great Financial Crisis.