A Market-Based Approach to Development Finance: Case Study of the Capital Access Program

James D. Laughlin and Vincent A. Digirolamo
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James D. Laughlin: Indiana Economic Development Council, Inc.
Vincent A. Digirolamo: National City Bank, Indiana

Economic Development Quarterly, 1994, vol. 8, issue 4, 315-324

Abstract: Due to regulation and other constraints, major suppliers of commercial credit are limited in the risk/return trade-offs that they are willing to assume, leaving specific gaps in credit markets undersupplied or not supplied at all. These gaps primarily affect small and medium-sized firms that lack the collateral or earnings track record required by banks, or the profit or acquisition potential required by venture capitalists. This article examines the effectiveness of the Capital Access Program (CAP) in helping commercial banks expand their lending parameters and narrow capital gaps. CAP provides banks with a partial loan loss reserve to enable them to absorb higher risks associated with many business loans. CAP increases the risk tolerance of commercial banks without displacing private financing or involving excessive bureaucracy. Recognizing its effectiveness, several state and local governments have since adopted the program. Committing a combined total of $7 million in public funds, CAP programs have leveraged $150 million in private commercial loans, primarily to small and medium-sized firms.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ecdequ:v:8:y:1994:i:4:p:315-324

DOI: 10.1177/089124249400800401

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