Adverse selection and moral hazard in the Japanese public credit guarantee schemes for SMEs
Kuniyoshi Saito, Daisuke Tsuruta 14 November 2014
In Japan, loans with 100% guarantees account for more than half of all loans covered by public credit guarantee schemes, but banks claim that they do not offer loans without sufficient screening and monitoring even if the loans are guaranteed. This column presents evidence of adverse selection and moral hazard in Japanese credit guarantee schemes. The problem is less severe for loans with 80% guarantees.
Credit rationing caused by capital market imperfections is widely seen as an important phenomenon in the loan market, especially for small and medium enterprises (SMEs). Among various ways of alleviating the problem, credit guarantee schemes are one of the most important policy tools in many countries. An economic rationale for such public intervention is that it can enhance efficiency by providing additional funds for SMEs that are in fact healthy but unable to secure enough loans because of the informational gap between lenders and borrowers.
credit rationing, SMEs, credit, public guarantees, Japan, capital markets, asymmetric information, moral hazard, adverse selection, loan guarantees, insurance
Do all firms have equal access to external financing?
Neil Kay, Gavin Murphy, Conor O'Toole, Iulia Siedschlag, Brian O'Connell 29 June 2014
Small and medium-size enterprises (SMEs) often report difficulties in obtaining external finance. Based on new research, this column argues that these difficulties are not due to greater financial risks associated with SMEs. Instead, they are the result of imperfections in the market for external finance that negatively affect smaller and younger enterprises. The same research has shown that these types of firms are also the most reliant on external finance to support their investment and growth.
The proportion of bank loan acceptances has fallen significantly following the crisis, along with the level of enterprise investment. The sharpest falls in both have been in countries hardest hit by the crisis. While in a number of countries – such as Finland, Malta, and Sweden – the declines have been modest, in others – such as in Bulgaria, Ireland, Denmark, Lithuania, Spain, and Greece – they have approached or exceeded 30%.
Figure 1. Percentage change in bank loan acceptances
EU policies Financial markets
investment, lending, credit, Finance, SMEs, credit rationing, borrowing, information asymmetries
Greater inequality and household borrowing? New evidence from household data
Olivier Coibion, Yuriy Gorodnichenko, Marianna Kudlyak, John Mondragon 29 January 2014
One popular explanation for the increase in US household debt in the years before the subprime mortgage crisis is that households with stagnating incomes borrowed more to ‘keep up with the Joneses’. This column presents recent research that questions this explanation. Low-income households in high-inequality regions in fact borrowed relatively little compared to similar households in low-inequality regions. A theoretical model in which greater local income inequality facilitates the screening of loan applicants makes predictions that are consistent with the data.
The financial crisis of 2008–09 was preceded by an exceptional rise in borrowing by US households, accounted for primarily by a rise in mortgage debt. There are two main views about the source of this ‘great leveraging’:
- The rise in borrowing reflected ‘credit supply’ factors.
Proponents point to progress in information technology (Sanchez 2009) and rising financialisation of debt (especially mortgages) as increasing the supply of credit, particularly to low-income and high-risk households (Drozd and Serrano-Padial 2013).
Financial markets Poverty and income inequality
US, Inequality, debt, credit rationing, subprime mortgage crisis