Is Small Beautiful? The Resilience of Small Banks During the European Debt Crisis

We look at the lending behaviour of small and large banks in the Eurozone during the sovereign debt crisis. We find that relative to large banks, small banks in peripheral countries (1) do not tend to substitute private loans with public debt and, as a result, are less likely to contribute to a credit crunch in periods of crisis and, (2) are less pro-cyclical in that they exhibit a more stable lending behaviour across good and bad times. Our results support incentives embedded in new banking regulation that penalise bank size.