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 ...
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.
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