SMEs' near-death experiences. Do local banks extend a helping hand?

We investigate how the presence of local banks affects the prospects of troubled small and medium-sized enterprises (SMEs). Using a new dataset covering the years 2006-2015, we find evidence supporting the notion that local banks extend a helping hand to SMEs and act in this role efficiently. We establish that SMEs operating in regions where local banks hold a relatively strong position suffer losses less frequently, accumulate lower losses in relation to equity capital, report shorter series of losses, have a lower probability of legal bankruptcy or serious financial distress, and recover more easily from financial difficulties. Therefore, our study suggests that policies shaping the local structures of banking markets have a material impact on distressed SMEs' prospects.