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The authors study the effect of financial distress in foreign parent banks on local SME financing in 14 central and eastern European countries during the early stages of the 2007-2008 financial crisis. They use survey data on applicant and non-applicant firms that enable them to disentangle effects driven by shocks to the banking system from recession-driven demand shocks that may vary across lenders. They find strong evidence that credit tightened in the relatively early stages of the crises caused by the following types of bank financial distress: low equity ratio; low Tier 1 capital ratio; and losses on financial assets.
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