Housing Collateral and Small Firm Activity in Europe

We investigate the importance of the housing-based collateral lending channel on firm borrowing, investment and employment. We focus on small firms in France, Italy, Spain and the United Kingdom. To identify a credit supply effect, as opposed to a home-equity driven demand effect, we compare activity in similar firms that differ by the degree of financial opacity, and therefore the degree of their reliance on collateral to overcome borrowing constraints. We find that changing house prices have a more pronounced effect on borrowing, investment and employment in financially more opaque firms. This relationship is particularly strong in southern Europe (Italy and Spain), where financial frictions are larger and the use of collateral more important