Who needs credit and who gets credit in Eastern Europe?

1. Who needs credit and who gets credit in Eastern Europe? Comments by Evan Kraft Croatian National Bank *The views expressed in these comments do not necessarily reflect the views of the Croatian National Bank or its management.

2. What the paper does • Building on comparable work, examine over 8000 firms in 20 EE countries to study determinants of borrower discouragement • Key literature: US: Cole 2008, Han, Fraser and Storey 2008; large international cross-section: Chakravarty and Xiang, 2010) • Important policy issue: do firms that could and should get credit fail to apply for credit

3. A few caveats • Data is from 2004-5 BEEPS, so may not reflect conditions at height of credit boom • Also may not reflect conditions now

4. Data issues • Creditor rights: Authors note that creditor rights are better protected in Western Europe than Eastern Europe, based on indicator from Doing Business • Doing Business seems to provide only a legal analysis, no analysis of implementation • Also note that low value of WE due to low values for Greece and Portugal—not highly representative • And note that Albania has higher protection than Germany (?)

5. Data issues • Authors use variable percentage of payments going through bank accounts • A little hard to believe that this is higher in EE than WE • However, in Croatia firms are legally required to receive all payments through accounts • They may underreport, since this is a legal issue, while firms in other countries may not have such incentives • Income paid through bank account far higher in Ireland than other WE countries

6. Data issues • Macedonia has an extraordinarily high level of discouragement (52%) • Could test for robustness by excluding Macedonia

7. Foreign banks and formality of finance • Perhaps most striking finding is that greater foreign bank presence is correlated with greater discouragement • Authors explain this by firms’ belief that banks will not grant them credit

8. Note what has been found about foreign banks • Foreign banks do tend to attract more transparent, larger firms • They increase competition, which might undermine the value of forming bank-client relationships • But Giannetti and Ongena (2009) find that foreign banks do not tend to dissolve pre-existing relationships when they acquire domestic banks in transition countries • And overall formation of new relationships does not suffer

9. What can we take away? • A Romanian anecdote (perhaps apocryphal) • Underlines need to understand culture and sociological context • Also, micro-level research on foreign banks would be very desirable • What about adding an indicator of banking sector reform (for transition countries) or banking sector development in regression 9 (cross-country determinants )

10. Is more credit always better? Do we need to encourage the discouraged? • A key finding of the paper is that 88% of discouraged borrowers actually are creditworthy • In general, this suggests a need to find ways to encourage these borrowers to borrow • Note that while the authors make a big effort to estimate the creditworthiness of firms, they have to rely on subjective assessments of the need to borrow

11. Credit and vulnerability • It has been fashionable (and the author of these comments has subscribed) to say that financial development promotes growth • But the financial crisis should give us pause • Cetorelli (2009) gives an interesting micro argument, showing that firms founded in times of buoyant credit supply were more likely to fail in crisis, probably due to weaker financial structure. • When do we have too much of a good thing?