European Central Bank working paper links Swedish firms’ low credit-line usage to dynamic constraints driven by financial uncertainty

The European Central Bank published a working paper, which it notes does not necessarily reflect ECB views, analysing why Swedish non-financial firms draw only a small fraction of their available bank credit lines. Using Sweden’s KRITA credit register and a dynamic model in which today’s borrowing increases expected future illiquidity costs, the paper argues that low utilisation can reflect tight “dynamic” credit constraints rather than abundant slack, with financial uncertainty driven by liquidity shocks playing a larger role than real uncertainty driven by cash-flow shocks. Evidence from monthly loan-level data (December 2019 to December 2022) shows credit lines are widespread and sizable but lightly used: 51.2% of firms have a credit line (86.2% on an asset-weighted basis), committed amounts average 13.4% of net assets, and the average utilisation rate is 22.6%, leaving undrawn amounts of 9.3% of net assets. The interest-rate spread on drawn credit lines averages 3.8%, below reported returns on equity across the size distribution. Regression tests align utilisation with uncertainty proxies, including a 4.2 percentage point utilisation gap between firms in high versus low cash-flow volatility industries, and a 10.4 percentage point lower utilisation rate when a firm’s remaining credit-line maturity is one year or less. A structural estimation produces a model-implied borrowing-capacity measure closely correlated with committed amounts (R2 0.72) and finds borrowing rises by about 0.35 SEK for each 1 SEK increase in the inferred credit limit, even when firms are not near their limit; counterfactual simulations attribute most of the low utilisation to financial shocks rather than productivity shocks.