Companies are likely to face even more difficulties in accessing bank credit in the future, according to a new study published today by the Central Bank of Ireland.

The report finds that a smaller number of banks account for an increasing share of lending to small and medium sized enterprises (SMEs). This growing concentration typically leads to more difficult financing conditions for SMEs, according to the authors’ survey of international literature and evidence.

With greater concentrations, the banking system tends to lend less to firms and credit that is issued tends to be on less favourable, and more costly terms.

A significant reason for the trend towards greater concentration in the market is a lower level of foreign bank activity in the market. “In a time of crisis foreign market participants react by more aggressively reducing exposure than domestic banks” the study finds.

Policy measures introduced already introduced or announced, including the loan guarantee scheme, microfinance fund and credit register, should help address the problem it says, but the study suggests that theses measures will not be enough to overcome the inherent problems associated with greater concentration in the lending market.

The paper, entitled “Bank competition through the credit cycle: implications for SME funding” was published as part of the Central Bank’s Economic Letters series.