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Public Development Banks and Credit Market Imperfections

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  • Eslava, Marcela
Abstract
This paper is devoted to understanding the role of public development banks in alleviating financial market imperfections. We explore two issues: 1) which types of firms should be optimally targeted by public financial support; and 2) what type of mechanism should be implemented in order to efficiently support the targeted firms' access to credit. We model firms that face moral hazard and banks that have a costly screening technology, which results in a limited access to credit for some firms. We show that a public development bank may alleviate the inefficiencies by lending to commercial banks at subsidized rates, targeting the firms that generate high added value. This may be implemented through subsidized ear-marked lending to the banks or through credit guarantees which we show to be equivalent in "normal times". Still, when banks are facing a liquidity shortage, lending is preferred, while when banks are undercapitalized, a credit guarantees program is best suited. This will imply that 1) there is no "one size fits all" intervention program and 2) that any intervention program should be fine-tuned to accommodate the characteristics of competition, collateral, liquidity and banks capitalization of each industry.

Suggested Citation

  • Eslava, Marcela, 2016. "Public Development Banks and Credit Market Imperfections," CEPR Discussion Papers 11160, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11160
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    Cited by:

    1. Alfredo Schclarek & Jiajun Xu & Jianye Yan, 2023. "The maturity‐lengthening role of national development banks," International Review of Finance, International Review of Finance Ltd., vol. 23(1), pages 130-157, March.
    2. Jean Bonnet & Sylvie Cieply & Marcus Dejardin, 2016. "Credit rationing or overlending? An exploration into financing imperfection," Applied Economics, Taylor & Francis Journals, vol. 48(57), pages 5563-5580, December.
    3. Bakaykina, A., 2024. "Determinants of SME support participation in the Russian two-tier system," Journal of the New Economic Association, New Economic Association, vol. 62(1), pages 75-100.
    4. Marco FRIGERIO & Daniela VANDONE, 2018. "Virtuous or Vicious? Development Banks in Europe," Departmental Working Papers 2018-07, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    5. Gabriel Jiménez & José-Luis Peydró & Rafael Repullo & Jesús Saurina, 2017. "Burning Money? Government Lending in a Credit Crunch," Working Papers 984, Barcelona School of Economics.
    6. Clò, Stefano & Frigerio, Marco & Vandone, Daniela, 2022. "Financial support to innovation: The role of European development financial institutions," Research Policy, Elsevier, vol. 51(10).
    7. Marcela Eslava & John Haltiwanger & Álvaro Pinzón, 2022. "Job Creation in Colombia Versus the USA: ‘Up‐or‐out Dynamics’ Meet ‘The Life Cycle of Plants’," Economica, London School of Economics and Political Science, vol. 89(355), pages 511-539, July.
    8. Régis MARODON, 2020. "Les banques de développement peuvent-elles relever le défi du développement durable ?," Working Paper 8eb18544-95bf-404e-bbfe-e, Agence française de développement.
    9. Adeyemi Adebayo, 2022. "What Do State-Owned Development Financial Institutions (Sodfis) In South Africa Do?," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 67(235), pages 123-152, October –.
    10. Marcela Eslava & John C. Haltiwanger & Alvaro Pinzón, 2019. "Job creation in Colombia vs the U.S.: “up or out dynamics” meets “the life cycle of plants”," NBER Working Papers 25550, National Bureau of Economic Research, Inc.
    11. Isaac Khambule, 2021. "COVID-19 and the Counter-cyclical Role of the State in South Africa," Progress in Development Studies, , vol. 21(4), pages 380-396, October.
    12. Frigerio, Marco & Vandone, Daniela, 2020. "European development banks and the political cycle," European Journal of Political Economy, Elsevier, vol. 62(C).
    13. Chatzouz, Moustafa & Gereben, Áron & Lang, Frank & Torfs, Wouter, 2017. "Credit guarantee schemes for SME lending in Western Europe," EIB Working Papers 2017/02, European Investment Bank (EIB).
    14. Waidelich, Paul & Steffen, Bjarne, 2024. "Renewable energy financing by state investment banks: Evidence from OECD countries," Energy Economics, Elsevier, vol. 132(C).
    15. José Antonio Ocampo & Paola Arias & Juan David Torres, 2018. "La banca nacional de desarrollo en Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, issue 88, pages 1-36, December.
    16. Massimo FLORIO & Matteo FERRARIS & Daniela VANDONE, 2018. "State-Owned Enterprises: Rationales for Mergers and Acquisitions," CIRIEC Working Papers 1801, CIRIEC - Université de Liège.
    17. Régis MARODON, 2020. "Can development banks step up to the challenge of sustainable development?," Working Paper 8eb18544-95bf-404e-bbfe-e, Agence française de développement.
    18. Gong, Di & Xu, Jiajun & Yan, Jianye, 2023. "National development banks and loan contract terms: Evidence from syndicated loans," Journal of International Money and Finance, Elsevier, vol. 130(C).
    19. Raschid Amamou & Áron Gereben & Marcin Wolski, 2023. "Assessing the impact of the EIB’s intermediated lending to SMEs during funding shocks," Small Business Economics, Springer, vol. 60(3), pages 975-1007, March.

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    More about this item

    Keywords

    Public development banks; Governmental loans and guarantees; Costly screening; Credit rationing;
    All these keywords.

    JEL classification:

    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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