Bank concentration and SME borrower discouragement: the moderating influence of banking system stability

This study uses a multilevel analysis to examine how banking system stability influences the relationship between bank concentration and borrower discouragement. The analysis uses 26 rounds of the Survey on the Access to Finance of Enterprises for 11 Eurozone countries between 2010 and 2022. We find that banking system stability reduces or even reverses the negative effect of bank concentration on borrower discouragement for small and medium-sized enterprises. Specifically, increased bank concentration reduces borrower discouragement when banking system stability, measured using the Z-score, is above certain thresholds: 20.6 for term loans and 21.97 for credit lines. These thresholds correspond to the 90th–95th percentiles of banking system stability in the data, meaning that only about 5–10% of firms operate in banking systems sufficiently stable for concentration to reduce discouragement. Micro firms benefit the most from bank concentration in stable banking systems but suffer the most in unstable ones. Additionally, increased bank concentration discourages credit line borrowers more than term loan borrowers in unstable systems, with the opposite effect in stable systems. Overall, maintaining banking system stability is essential for realizing the potential benefits of bank concentration, especially for small firms.