Credit availability in the crisis: the European investment bank group

In this paper we propose a moral hazard model to illustrate a credit crunch scenario. A firm is denied the access to bank funding due to high informational or monitoring costs that the bank must pay to induce the firm to behave. This is likely to happen in periods of recession, when trust between economic actors is limited. We then examine the activity carried out by the European Investment Bank Group (EIBG), with special attention to the provision of (1) credit lines to banks to help them to finance small and medium-sized enterprises (SMEs) and (2) guarantees for portfolios of SMEs' loans. We show that such services are extremely helpful to overcome the credit crunch as they mitigate the moral hazard problem without resorting to informational or monitoring expenses.