Don't Stop Me Now: The Impact of Credit Market Segmentation on Firms' Financing Constraints

This paper investigates how the withdrawal of banks from their cross-border business has impacted firms' borrowing costs since the recent crisis. We combine aggregate information on total and cross-border credit with firm-level survey data. We find that the decline in cross-border lending has led to a deterioration in the borrowing conditions of SMEs. In countries with more pronounced reductions in cross-border credit inflows to firms and banks, the likelihood of a rise in firms' external financing costs has increased. This result is mainly driven by the interbank channel, which has played a crucial role in transmitting shocks to the real sector across borders.