Legal-institutional environment, social capital and cost of bank financing for SMEs: Evidence from the Euro-area

Access conditions to bank credit in Europe play a decisive role in the survival of small- and medium-sized enterprises (SMEs). The economic literature points out that obstacles to credit access for SMEs mainly derive from their difficulty in producing high quality collaterals and from the opacity of their creditworthiness. The lack of transparency increases asymmetric information, which tends to be more severe during times of economic crises and leads to credit rationing and suboptimal lending to viable SMEs. Therefore, factors such as the legal-institutional environment and the quality of social capital may be crucial in increasing level of trust in the credit market, strengthening the relationship between creditors and borrowers, and consequently reducing the cost of financing. In this chapter, we address these issues with respect to European SMEs by using the European Central Bank (ECB) Survey on the Access to Finance of Enterprises (SAFE). Specifically, we employ data on eleven major economies of the euro area for the period 2009–2013.