The European Central Bank published Working Paper No 3058 on how monetary policy transmits through bank credit to entrepreneurs with different private wealth. Using SME loan application data, the paper finds that expansionary monetary policy increases banks’ approval rates disproportionately for lower-wealth business owners, while tighter policy reduces their access to credit and can widen wealth dispersion among entrepreneurs in the medium term. The analysis combines more than 130,000 SME loan applications at a large systemic euro area bank (2002–2018) with survey evidence from nearly 10,000 family-owned firms across 19 euro area countries (2009–2020). Around the bank’s credit-score approval cutoff, a one standard deviation increase in the shadow rate (3.3 percentage points) is associated with a 4.3 percentage point lower approval probability for entrepreneurs at the 25th percentile of wealth (around EUR 120,000), versus a near-zero marginal effect for those at the 75th percentile (around EUR 270,000). Loan approval is linked to higher outcomes three years later, with marginally approved applicants showing 7.2% higher annual income and 5.3% higher wealth than marginally rejected applicants; tighter policy is also associated with smaller loan amounts and higher spreads, particularly for lower-wealth owners. The paper links the channel to banks’ reliance on owners’ wealth as explicit or implicit collateral, with stronger effects for fully liable firms and evidence that higher private wealth predicts lower default even controlling for the bank’s credit score, and finds in the cross-country survey that the wealth-related transmission is stronger at less liquid and less capitalised banks.
European Central Bank 2025-05-20
European Central Bank publishes working paper showing monetary easing raises SME loan approvals and later wealth most for lower-wealth entrepreneurs
The European Central Bank's Working Paper No 3058 examines how monetary policy affects bank credit access for entrepreneurs with varying private wealth. The study reveals that expansionary policy disproportionately benefits lower-wealth business owners by increasing loan approval rates, while tighter policy reduces their credit access, potentially widening wealth disparities. The findings highlight entrepreneurs' wealth as collateral and show stronger effects at less liquid and capitalised banks.