Firms' trade credit and the local level of development of the banking system in Europe

Trade credit is an important complement to lending by financial intermediaries, especially in light of the current credit crisis. This paper links firms' use and provision of trade credit with the local state of development of the bank system. We question whether the use of trade credit is larger in regions with more developed banking systems and find that there is a degree of substitutability between suppliers and banks in the demand for short-term financing. Companies mainly obtain financing from suppliers when the prospects of obtaining from the banks are not particularly good, which results in a lower level of local development in the banking system. Empirical evidence comes from an extensive dataset of 25,000 Continental European companies over the period of 2002-2006.