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
When arm’s length is too far
Thorsten Beck, Hans Degryse, Ralph De Haas, Neeltje van Horen 25 July 2014
The small and medium-size enterprises (SMEs) were among the most severely affected in the Global Crisis. This column discusses new evidence on how different lending techniques affect lending in bad and good times. Data from 21 countries in central and eastern Europe show that ‘relationship lending’ alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
In the wake of the global financial crisis, policymakers’ attention has focused on lending to small and medium-sized enterprises (SMEs) as these were among the most affected firms when the credit cycle turned. In the US, president Obama signed the Small Business Jobs Act in 2010, which authorised the creation of the Small Business Lending Fund Programme to increase the availability of credit for small businesses. In the UK, policymakers have put a lot of pressure on banks to increase, or at least not reduce, lending to SMEs – often seen as the backbone of the economy.
bank lending, SMEs
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
Why scarce small and medium enterprise financing hinders growth in Latin America: A role for public policies
Rolando Avendaño, Niels Boehm, Elisa Calza 27 January 2013
Small and medium-sized enterprises provide the vast majority of employment in developing countries and are keystones in the productive structures of emerging economies. This column argues that the growth of such firms is being hindered by scarce financing. Looking at Latin America, it is clear that public financial institutions are increasingly important in meeting credit demands. If emerging economies want to see long-term growth, there needs to be a comprehensive approach to reducing the ‘traditional’ barriers to small and medium enterprise financing.
Small and medium enterprises represent a significant share of emerging economies’ business fabric. Nevertheless, they continue to face multiple challenges in meeting their financing needs. Public financial institutions have come to play an active role in addressing these financing gaps through new operational mechanisms and adapted instruments.
Latin America, Finance, SMEs
Reinvigorating the trade policy agenda: Think supply chain!
Bernard Hoekman, Selina Jackson 23 January 2013
The revolution in manufacturing – increasingly known as ‘global value chains‘ – has changed the world of trade policy as much as it has changed the global industrial landscape. This column discusses new research suggesting that border management and transport and telecommunications infrastructure services matter far more than trade tariffs. Improving infrastructure and management would increase global GDP far more than the complete elimination of tariffs. However, it won’t be easy. Tackling supply chain barriers will require dynamic and responsive national and international trade policymaking procedures that are more in step with industrial practices.
International supply chains have become a fundamental feature of global commerce, with goods being processed – and value being added – in the multiple countries that are part of the chain.
Global governance International trade
barriers to trade, SMEs, global supply chain, small and medium-sized enterprises
Foreigners vs. natives: Bank lending and loan pricing
Thorsten Beck, Vasso P. Ioannidou, Larissa Schäfer 13 July 2012
Financial aspects of the global crisis and the rolling bank scandals have led many to think again about their reliance on foreign banks. This column presents evidence that foreign banks do act differently. Among other things, they charge lower interest rates, but provide loans for shorter maturities, and are more likely to demand collateral.
The past two decades have seen a large increase in foreign bank entry across the globe. The increase in foreign bank participation has been especially strong in the transition countries of Central and Eastern Europe and Latin America, reaching well above 80% of the number of banks in several countries (Claessens et al. 2008). The effects of foreign bank participation on lending to small and medium enterprises (SMEs) have been a controversial issue among academics and policymakers alike.
Global crisis International finance
foreign banks, SMEs, Bolivia
Recessions and small business access to credit: Lessons for Europe from interstate banking deregulation in the US
Mathias Hoffmann, Iryna Stewen 19 February 2012
Few would deny that there is a strong link between the health of a country’s banks and its public finances. With that in mind, this column argues that the banking system can learn from banking deregulation in the US, with knock on effects for Europe’s sovereign debt crisis.
The European sovereign debt crisis is often viewed as a banking crisis in disguise (see, for instance, Mody and Sandri 2011 on this site). Policymakers are rightly concerned about the prospect that ever more cautious banks may eventually stop lending to small and medium-sized businesses (or enterprises, known as SMEs). While large firms can tap capital markets directly, SMEs are particularly bank dependent.
recessions, credit, SMEs, banking deregulation