Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 13/1999:
Bank Relationships and Small-Business Closures during the Finnish Recession of the 1990s

Helvi Kinnunen () and Vesa Vihriälä

Abstract: The paper examines the role of bank relationships in business closures during the Finnish economic crisis of the early 1990s. We utilise a unique panel data set of 474 small and medium-sized firms, for which we have standard accounting information and for which we can in addition identify whether the firm had a lending relationship with the most troubled part of the banking system, namely the Savings Bank of Finland and Skopbank. By estimating a logit model we find that, even accounting for the effects of liquidity, profitability, indebtedness, age and size, firms that had a lending relationship with the savings banks concerned were more likely to close in 1992 than other firms that year or the same firms in other years. Thus being a loan customer of these banks entailed greater risk for firms than having a lending relationship with other intermediaries only in 1992, which was the year the banking sector came to a head. The result lends support to the hypothesis that financial factors affect real outcomes not only through firm and household balance sheets but also through bank behaviour.

Keywords: financial factors; credit crunch; banking crisis; (follow links to similar papers)

23 pages, September 20, 1999

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