Small Business Economics

, Volume 43, Issue 4, pp 945–957 | Cite as

Asymmetric changes in Australia’s small business loan rate

Article
First Online:
Accepted:

Abstract

This paper examines the dynamic asymmetric relationship between changes in the Reserve Bank of Australia’s (RBA) cash rate and the interest rate for small business loans using monthly data (1990–2011). The results provide support for the rockets-and-feathers hypothesis with respect to both the amount and adjustment asymmetries. While the RBA’s rate rises exert a one-to-one and instantaneous impact on the loan rate, its rate cuts are only slowly and partially passed onto small businesses with a delay of 1–2 months. The results also suggest that the recent global financial crisis increased the cost of borrowing for small businesses in Australia by 2.21 %. These findings indicate that small businesses have limited time to respond to interest rate rises and not provided with the full benefit of interest rate decreases. Addressing this problem should ease the interest rate burden for small businesses and enhance their contribution to the economy.

Keywords

Asymmetric behaviour Small businesses Bank lending Australia 

JEL Classifications

E43 E58 L26 
This is a preview of subscription content, log in to check access.

Notes

Acknowledgments

We wish to thank Professor László Szerb, the Associate Editor, and two anonymous referees, whose invaluable inputs and comments considerably improved an earlier version of this article. The usual caveat applies.

References

  1. Ardic, O. P., Mylenko, N., & Saltane, V. (2012). Access to finance by small and medium enterprises: A cross-country analysis with a new data set. Pacific Economic Review, 17(4), 491–513.CrossRefGoogle Scholar
  2. Bacon, R. W. (1991). Rockets and feathers: The asymmetric speed of adjustment of U.K. retail gasoline prices to cost changes. Energy Economics, 13, 211–218.CrossRefGoogle Scholar
  3. Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & Finance, 30(11), 2931–2943.CrossRefGoogle Scholar
  4. Berger, A. N., & Frame, W. S. (2007). Small business credit scoring and credit availability. Journal of Small Business Management, 45(1), 5–22.CrossRefGoogle Scholar
  5. Berger, A. N., Klapper, L. F., & Udell, G. F. (2001). The ability of banks to lend to informationally opaque small businesses. Journal of Banking & Finance, 25(12), 2127–2167.CrossRefGoogle Scholar
  6. Borland, J., & Home, R. (1994). Establishment-level employment in manufacturing industry: Is small really beautiful? Australian Bulletin of Labour, 20(2), 110–128.Google Scholar
  7. Breen, J. (2010). Community perceptions of small business. Melbourne: Centre for Tourism and Service Research, Victoria University.Google Scholar
  8. Chakraborty, A., & Mallick, R. (2012). Credit gap in small businesses: Some new evidence. International Journal of Business, 17(1), 66–80.Google Scholar
  9. Chen, L. H., Finney, M., & Lai, K. S. (2005). A threshold cointegration analysis of asymmetric price transmission from crude oil to gasoline prices. Economics Letters, 89, 233–239.CrossRefGoogle Scholar
  10. Clarke, A. D. (2007). Australian corporate governance and SMEs: The forgotten stakeholders? Australian Business Law Review, 35, 7–17.Google Scholar
  11. Cole, R., Goldberg, L., & White, L. (2004). Cookie-cutter versus character: The micro structure of small-business lending by large and small banks. Journal of Financial and Quantitative Analysis, 39(2), 227–251.CrossRefGoogle Scholar
  12. de Haan, L., & Sterken, E. (2011). Bank-specific daily interest rate adjustment in the Dutch mortgage market. Journal of Financial Services Research, 39, 145–159.CrossRefGoogle Scholar
  13. Department of Innovation, Industry, Science and Research (DIISR). (2011). Key statistics: Australian small business. Canberra: Australian Government.Google Scholar
  14. Dietrich, A. (2012). Explaining loan rate differentials between small and large companies: Evidence from Switzerland. Small Business Economics, 38(4), 481–494.CrossRefGoogle Scholar
  15. Elliott, G., Rothenberg, T., & Stock, J. H. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64(4), 813–836.CrossRefGoogle Scholar
  16. Enders, W., & Granger, C. W. J. (1998). Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business and Economic Statistics, 16(3), 304–311.Google Scholar
  17. Everett, J., & Watson, J. (1998). Small business failure and external risk factors. Small Business Economics, 11, 371–390.CrossRefGoogle Scholar
  18. Ferri, G., & Messori, M. (2000). Bank-firm relationships and allocative efficiency in northeastern and central Italy and in the south. Journal of Banking & Finance, 24(6), 1067–1095.CrossRefGoogle Scholar
  19. Fielden, S., Davidson, M., Dawe, A., & Makin, P. (2003). Factors inhibiting the economic growth of female owned small businesses in North West England. Journal of Small Business and Enterprise Development, 10(2), 152–166.CrossRefGoogle Scholar
  20. Fraser, S. (2006). Finance for small and medium-sized enterprises: A report on the 2004 UK survey of SME finances. Coventry: Centre for Small and Medium-sized Enterprises, Warwick Business School.Google Scholar
  21. Gibson, B., & Cassar, G. (2005). Longitudinal analysis of relationships between planning and performance in small firms. Small Business Economics, 25(3), 207–222.CrossRefGoogle Scholar
  22. Gregory, B. T., Rutherford, M. W., Oswald, S., & Gardiner, L. (2005). An empirical investigation of the growth cycle theory of small firm financing. Journal of Small Business Management, 43(4), 382–392.CrossRefGoogle Scholar
  23. Heffernan, S. A. (1997). Modelling British interest rate adjustment: An error correction approach. Economica, 65, 211–231.CrossRefGoogle Scholar
  24. Hutchinson, R. W. (1995). The capital structure and investment decisions of the small owner-managed firm: some exploratory issues. Small Business Economics, 7(3), 231–239.CrossRefGoogle Scholar
  25. Inspector-General of Bankruptcy. (1996). Annual report by the Inspector-General in Bankruptcy: July 1995-June 1996. Canberra: Government Publishing Service.Google Scholar
  26. Jalaluddin, A. (2007). Motivations of Australian small business firms to apply profit-loss sharing method of finance. Review of Islamic Economics, 11, 53–66.Google Scholar
  27. Johansen, S. (1995). Likelihood-based Inference in Co-integrated vector autoregressive models. Oxford: Oxford University Press.CrossRefGoogle Scholar
  28. Kon, Y., & Storey, D. (2003). A theory of discouraged borrowers. Small Business Economics, 21, 37–49.CrossRefGoogle Scholar
  29. Kotey, B. (1999). Debt financing and factors internal to the business. International Small Business Journal, 17, 11–29.CrossRefGoogle Scholar
  30. Lee, J., & Strazicich, M. C. (2003). Minimum lagrange multiplier unit root test with two structural breaks. Review of Economics and Statistics, 85, 1082–1089.CrossRefGoogle Scholar
  31. Levenson, A. R., & Willard, K. L. (2000). Do firms get the financing they want? Measuring credit rationing experienced by small businesses in the US. Small Business Economics, 14(2), 83–94.CrossRefGoogle Scholar
  32. Lowe, P. (1995). The link between the cash rate and market interest rates. Research discussion paper 9206. Sydney: Reserve Bank of Australia.Google Scholar
  33. Machauer, A., & Weber, M. (1998). Bank behaviour based on internal credit ratings of borrowers. Journal of Banking & Finance, 22(10–11), 1355–1383.CrossRefGoogle Scholar
  34. Maudos, J., & Fernandez de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking & Finance, 28, 2259–2281.CrossRefGoogle Scholar
  35. Niskanen, M., & Niskanen, J. (2010). Small business borrowing and the owner–manager agency costs: Evidence on Finnish data. Journal of Small Business Management, 48(1), 16–31.CrossRefGoogle Scholar
  36. North, D., Baldock, R., & Ekanem, I. (2010). Is there a debt finance gap relating to Scottish SMEs? A demand-side perspective. Venture Capital, 12(3), 173–192.CrossRefGoogle Scholar
  37. Peltoniemi, J. (2007). The benefits of relationship banking: Evidence from small business financing in Finland. Journal of Financial Services Research, 31(2), 153–171.CrossRefGoogle Scholar
  38. Reserve Bank of Australia (2012). Statistical tables (Tables F1 and F5). Accessed 15 May 2012. http://www.rba.gov.au/Statistics.
  39. Reserve Bank of Australia (2013). Statistical tables (Table F5). Accessed 10 June 2013. http://www.rba.gov.au/Statistics.
  40. Revesz, J., & Lattimore, R. (1997). Small business employment, staff research paper, Industry Commission. Canberra: Australian Government Publishing Service.Google Scholar
  41. Rousseas, S. (1985). A mark up theory of bank loan rates. Journal of Post Keynesian Economics, 8(1), 135–144.Google Scholar
  42. Saadon, Y., Ben David, N., Benzion, U., & Shiffer, Z. (2008). Asymmetric preferences and the central bank’s interest rate. Journal of Money, Investment and Banking, 1(5), 67–84.Google Scholar
  43. Scott, J. A., & Dunkelberg, W. C. (1999). Bank consolidation and small business lending: A small firm Perspective. In R. Lang (Ed.), Business access to capital and credit (pp. 328–361). Dallas: Federal Reserve Bank of Dallas.Google Scholar
  44. Stock, J. H., & Watson, M. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61, 783–820.CrossRefGoogle Scholar
  45. Valadkhani, A. (2013). The pricing behaviour of Australian banks and building societies in the residential mortgage market. Journal of International Financial Markets, Institutions and Money, 26, 133–151.CrossRefGoogle Scholar
  46. Valadkhani, A., & Anwar, S. (2012). Interest rate pass through and the asymmetric relationship between the cash rate and the mortgage rate. Economic Record, 88(282), 341–350.CrossRefGoogle Scholar
  47. Valadkhani, A., & Bollen, B. (2013). An alternative approach to the modelling of interest rate pass through and asymmetric adjustment. Economics Letters, 120(3), 491–494.CrossRefGoogle Scholar
  48. Verreynne, M.-L., & Meyer, D. (2010). Small business strategy and the industry life cycle. Small Business Economics, 35, 399–416.CrossRefGoogle Scholar
  49. Vos, E., Yeh, A. J.-Y., Carter, S., & Tagg, S. (2007). The happy story of small business financing. Journal of Banking & Finance, 31, 2648–2672.CrossRefGoogle Scholar
  50. Watson, J., Newby, R., & Mahuka, A. (2009). Gender and the SME finance gap. International Journal of Gender and Entrepreneurship, 1(1), 42–56.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Swinburne Business SchoolSwinburne University of TechnologyHawthornAustralia
  2. 2.Small Business Management and Accounting, UNE Business SchoolUniversity of New EnglandArmidaleAustralia

Personalised recommendations