The impact of Brexit on SME lending in the UK

Abstract

Using a difference-in-differences model, we find a significant 1.2 % (4.8 %) quarterly (annual) lending contraction to Small and Medium-Sized Enterprises (SMEs) in the UK following the Brexit vote compared to similar European countries. This impact persisted in several quarters, particularly during key Brexit milestones, reflecting the prolonged uncertainty induced by Brexit. Within-country analysis, using postcode-level data, reveals severe loan contractions in rural and peripheral areas, as well as in regions with high EU export proportions, highlighting regional disparities in Brexit's impact on SME lending. Our findings emphasize the importance of economic geography and the role of local conditions in shaping access to finance during shocks. These results call for regionally tailored policies that specifically address the resilience and financial challenges faced by SMEs in rural and peripheral regions, to foster economic recovery across the UK in the post-Brexit era. Our research contributes to the literature on regional resilience and finance, with implications for policymakers aiming to mitigate the unequal impacts of economic shocks.