Financial Intermediation Through Financial Disintermediation: Evidence from the ECB Corporate Sector Purchase Programme

We study the spillover effects of financial disintermediation on the supply of credit to small and medium enterprises (SMEs). We find direct central bank lending to large corporations induces banks to increase lending to SMEs by 8 to 12 percent. This effect is stronger for liquidity-constrained banks. SMEs with relationship banks affected by disintermediation borrow approximately €77,750 more relative to SMEs in the same country and industry. SMEs use these funds to invest in real activities and increase employment. We verify that our inferences are not due to changing economic fundamentals, demand from SMEs, or selection in central bank financing. Despite documenting positive effects, we also find that they disappear once new liquidity injections stop and the policy reaches a steady-state. Our findings provide some insights into this macroeconomic policy tool's ability to increase employment during the ongoing COVID-19 pandemic through financial disintermediation serving as an additional channel to provide access to financing for SMEs.