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Are lending relationships beneficial or harmful for public credit guarantees? Evidence from Japan's Emergency Credit Guarantee Program

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  • Ono, Arito
  • Uesugi, Iichiro
  • Yasuda, Yukihiro

Abstract

This paper examines the effectiveness of Japan's Emergency Credit Guarantee (ECG) Program set up during the financial turmoil following the failure of Lehman Brothers, in increasing credit availability and improving the ex-post performance of small businesses. In particular, using a unique firm–bank matched dataset, the paper examines whether lending relationships enhanced or dampened the effects of the ECG program. It is found that the ECG program significantly improved credit availability for firms using the program. However, when it was a relationship lender (main bank) that extended an ECG loan, the increased availability was partially, if not completely, offset by a decrease in non-ECG loans by the same bank. Further, propensity score matching estimations show that the ex-post performance of firms that received ECG loans from the main bank deteriorated more than that of firms that received non-ECG loans. We do not find such loan “substitution” or performance “deterioration” effects when a non-main bank extended ECG loans. Our findings suggest that close firm–bank relationships may have perverse effects on the efficacy of public credit guarantees.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 9 (2013)
Issue (Month): 2 ()
Pages: 151-167

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Handle: RePEc:eee:finsta:v:9:y:2013:i:2:p:151-167

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Web page: http://www.elsevier.com/locate/jfstabil

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Keywords: Loan guarantee; Relationship lending; Small business credit;

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Cited by:
  1. Ono, Arito & Uesugi, Iichiro, 2014. "SME Financing in Japan during the Global Financial Crisis: Evidence from Firm Surveys," HIT-REFINED Working Paper Series 6, Institute of Economic Research, Hitotsubashi University.
  2. Heshmati, Almas, 2013. "The Effect of Credit Guarantees on R&D Investment of SMEs in Korea," IZA Discussion Papers 7851, Institute for the Study of Labor (IZA).

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