Did High Leverage Render Small Businesses Vulnerable to the COVID‐19 Shock?

Using supervisory data on small and midsized nonfinancial enterprises (SMEs), we find that those SMEs with higher leverage faced tighter constraints in accessing bank credit after the COVID‐19 outbreak in spring 2020. Specifically, SMEs with higher pre‐COVID leverage obtained a smaller volume of new...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2024-09, Vol.56 (6), p.1367-1403
Main Authors: BRÄUNING, FALK, FILLAT, JOSÉ L., WANG, J. CHRISTINA
Format: Article
Language:English
Subjects:
bank capital
COVID-19
Credit
credit supply
Employment
Leverage
Loans
Pandemics
Public opinion
Small business
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Summary:Using supervisory data on small and midsized nonfinancial enterprises (SMEs), we find that those SMEs with higher leverage faced tighter constraints in accessing bank credit after the COVID‐19 outbreak in spring 2020. Specifically, SMEs with higher pre‐COVID leverage obtained a smaller volume of new loans and had to pay a higher spread on them during the pandemic period. Consistent with an inward shift in loan supply, these effects were concentrated in loans originated by banks with below‐median capital buffers. Highly levered SMEs that relied on low‐capital large banks for funding before the pandemic were not able to substitute to other sources of debt financing and thus experienced more of a reduction in total debt as well as a decline in investment and employment. On the other hand, the unprecedented public support, especially the Paycheck Protection Program (PPP), mitigated the adverse real effect stemming from bank credit constraints.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.13118