The greater negative impact of high EPU on SME lending can be linked to
demand- or supply-side effects. SMEs may invest less and thereby demand
fewer loans during episodes of high EPU. Indeed, large corporations may have
a larger international client network, and their investments may be less exposed
to local EPU shocks. Alternatively, episodes of high EPU probably coincide with
greater information asymmetries and thus a higher default risk among SMEs,
which may constrain banks’ loan supply.
In any case, considering the pivotal
role of SMEs in employment and valued added, persistent risk aversion with
regard to SME lending in the case of high EPU can harm the real economy
significantly and dampen the pace of recovery in Europe.