NEW RESEARCH | Why German small businesses survived the banking crisis

When banking rules were tightened after the 2008 financial crisis, the fear was that small and medium-sized enterprises (SMEs) would find it harder to borrow money. But a new study of German companies shows that bank loans did not decrease – instead, firms increasingly turned to other sources of finance.

– There is no evidence that small and medium-sized enterprises borrowed less money from banks after the financial crisis. On the contrary, they were financed to a much greater extent by public funds and grants from the state, says Linda Dastory, KTH.

In her doctoral thesis, she studied the financing of SMEs in Germany before and after the 2008 financial crisis. Germany is a particularly interesting context, she says.

– The country has a bank-based economy, meaning that it is mainly banks – and not the stock or bond markets – that provide capital to businesses and individuals. And around 99% of businesses are small and medium-sized, accounting for more than half of the workforce.

The study shows that innovation-oriented firms were more likely than others to use government funding.

– The government clearly had foresight. It offered alternative financing even before the consequences of the crisis hit. If it had not, we would have seen less innovation, less investment and therefore less growth and fewer jobs.

Useful lessons learned

Linda Dastory says the political message is clear: don’t relax regulations.

– My advice to policymakers is absolutely not to relax banking regulation. Instead, we need some form of risk sharing between the state and the banks. Banks should not bear the risk alone.

The study also highlights another kind of risk: that companies that are not productive in the long term can be kept alive by subsidies. But it is not about ‘free money’.

– Obtaining government funding is a long and competitive process. Companies have to show what they have done with the money, and the results are evaluated, says Linda Dastory.

The conclusion is that the German government’s actions played a crucial role in the recovery from the 2008 financial crisis.

– Had the government not been there to set up the system in time, I think we would have seen a much slower economic recovery, says Linda Dastory.

Contact linda.dastory@indek.kth.se

More about the thesis
Linda Dastory recently defended her thesis at KTH Innovation, Technical Change and the Labor Market. The dissertation also includes studies on financing constraints for innovation along firm size, how technical change reshapes tasks and wages in Sweden, and wage levels for migrant entrepreneurs in STEM.