Banking stability and borrower discouragement: a multilevel analysis for SMEs in the EU-28

The promotion of a more stable European banking system has become a priority which, not doubt, will bring important benefits to firms. However, bank stability comes with stronger regulations that could harm the access to finance of small and medium-sized enterprises (SMEs), which are highly dependent on bank financing. We provide new evidence on the association between the stability of a country’s banking system and SMEs access to finance through the study of borrower discouragement. We analyze 20,207 observations gathered among 16,382 firms operating in the EU-28 during the period 2011–2018. Applying multilevel methodology, our results show that SMEs operating in countries with more stable banking systems are less likely to be discouraged from applying for a loan. Working to achieve a more stable banking system does not seem to harm the access to finance of SMEs.