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
Don't expect too much from EZ fiscal union – and complete the unfinished integration of European capital markets!
Mathias Hoffmann, Bent E. Sørensen 09 November 2012
How do members of existing monetary unions share risk? Drawing on a decade of research, this column argues that fiscal transfers in fact make a limited contribution to economic coherence. In the context of Europe’s current crisis, the evidence suggests that unfinished capital market integration must be completed if we wish to see adequate and effective risk sharing.
The sovereign debt crisis apparently suggests that Eurozone economies should now move substantially closer towards fiscal union. Current policy discussions revolve much more around how such a fiscal union should be designed than whether fiscal union can solve Europe’s underlying problems of economic coherence. What can we expect from a fiscal union? Aren't private capital markets better suited to economic coherence?
EU policies International finance Monetary policy
capital markets, risk, Risk sharing, Eurozone crisis, fiscal union, banking union
Running for the exit: International banks and crisis transmission
Ralph De Haas, Neeltje van Horen 13 February 2011
Cross-border bank lending fell dramatically during the global crisis, but lending to some countries declined far more severely than to others. Recreating the monthly lending flows of the 118 largest international banks, this column finds that banks with head offices farther away from their customers are less reliable funding sources during a crisis, suggesting that the nationality of foreign banks matters.
In the wake of the 2007-2009 economic crisis, the virtues and vices of financial globalisation are being re-evaluated. Financial linkages between countries, in particular in the form of bank lending, have been singled out as a key channel of international crisis transmission. The IMF and the G20 have identified the volatility of cross-border capital flows as a priority related to the reform of the global financial system.
Global crisis International finance
capital markets, financial regulation, Cross-border lending
Banks and capital markets: A two-way nexus
Biagio Bossone 18 December 2010
How do banks and capital markets interact? This column brings together evidence to show that banks and capital markets, rather than simply being competitors, are in fact complements to each other – a finding that has implications for policy.
Financial regulation is being rethought. One area where the conventional wisdom is being redrawn is the interaction of banks and capital markets. For years, banks and capital markets have been viewed as competing sources of financing (e.g. Jacklin 1987, Jacklin and Bhattacharya 1988, Diamond 1997, and Allen and Gale 1999 and 2002). This “banks versus markets” distinction suggests that one sector, either banks or markets, develops at the expense of the other. As a result, regulators have tried to find a balance between the two.
capital markets, financial regulation, banks
Banks and capital markets as a coevolving financial system
Fenghua Song, Anjan Thakor 01 December 2010
Banks and capital markets are often viewed as competitors within the financial system, with some suggesting that each develops at the expense of the other. This column argues that banks and markets exhibit three forms of interaction. They compete, they complement each other, and they coevolve.
At a time when financial regulation is being fundamentally rethought, the optimal configuration of banks and capital markets within a financial system and how each should be regulated have become centre-stage issue. Banks and capital markets are often viewed as competing sources of financing (e.g. Allen and Gale 1997, Boot and Thakor 1997, and Dewatripont and Maskin 1995).
capital markets, financial regulation, banks
Why do foreign firms leave US equity markets?
George Andrew Karolyi, René M Stulz, Craig Doidge 23 September 2008
Foreign firms are increasingly delisting from US exchanges. Some blame the Sarbanes-Oxley Act for undermining US competitiveness. This column shows that there is little evidence that greater regulation hurt foreign listing in the US. The firms deregister after performing poorly.
Over the past few years there has been a lot of concern that the US has become less competitive in attracting listings by foreign firm (for example, see Zingales 2007). A popular explanation is that the Sarbanes-Oxley Act of 2002 (SOX) has made it more costly for foreign firms to have a US listing – so much so, it is argued, that fewer foreign firms now choose to cross-list in the US and firms already listed want to leave US equity markets.
Sarbanes Oxley Act, capital markets, US equity
How integrated are European financial markets? And what’s trust got to do with it?
Sebnem Kalemli-Ozcan, Bent E. Sørensen 28 November 2007
Europe’s capital markets are far from integrated. Here is some very innovative research that combines financial integration measures with ‘social capital’. It turns out that the market fragmentation stems in a large part from a lack of trust and confidence in certain regions and nations – things that the EU cannot directly affect.
Financial market integration is a key economic goal of European integration. Knitting together EU capital markets should foster efficient capital allocation and better risk pooling. Both of these should improve Europe’s investment climate and thus be pro-investment and pro-growth. As far as removing formal barriers is concerned, Europe has come a long way. Starting with the abolition of capital controls under the 1992 Single Market Programme and moving forward with the creation of the EMU and the Financial Services Action Plan, the EU has steadily removed the legal barriers.
EU, financial market integration, capital markets, capital flows