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

Arito Ono, Iichiro Uesugi and Yukihiro Yasuda

Journal of Financial Stability, 2013, vol. 9, issue 2, 151-167

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.

Keywords: Loan guarantee; Relationship lending; Small business credit (search for similar items in EconPapers)
JEL-codes: G21 G28 G38 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Working Paper: Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:9:y:2013:i:2:p:151-167

DOI: 10.1016/j.jfs.2013.01.005

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