In this research program we will investigate whether and how the structure of the banking system, the structure of firms’ relationships with banks, and credit information sharing mechanisms can help to overcome firms’ financing problems to promote economic development. This topic is of utmost importance for Brazil, especially for small and medium-sized enterprises (SMEs) and in times in which economic growth has been slowing down dramatically. Researchers, practitioners and policy makers are searching for answers to turn the situation around.
This research program features four initial research projects that will be undertaken by the two project leaders, Patrick Behr and Lars Norden, together with internationally and nationally renowned researchers, using Brazilian and international data. The results of these research projects are likely to generate useful insights that will impact the Brazilian society, firms, regulators, bankers, and policymakers.
Project 1: Bank-firm relationships and economic activity
Researchers: Patrick Behr (FGV/EBAPE), Lars Norden (FGV/EBAPE), Raquel de Freitas Oliveira (Banco Central do Brasil)
The main research question of this project is whether the number of bank relationships influences economic activity. In particular, we will analyze whether firms’ switching of banks is carried out by replacing existing credit relationships by new ones or by adding new ones to the existing ones and what this means for real effects of finance, i.e., how it impacts economic activity. A better understanding of the relationship between the number of bank relationships chosen by a firm and the regional economic development will inform us about the optimal number of optimal bank relationships and the optimal level of credit to achieve economic growth. The project will be based on large-scale data on Brazilian firms.
Project 2: Bank-firm relationships under pressure: Does trade credit help?
Researchers: Manuel Illueca (Universitat Jaume I), Lars Norden (FGV/EBAPE) and Stefan van Kampen (Erasmus University Rotterdam)
The main question of this project is whether SMEs can increase trade credit when banks reduce their credit supply to SMEs. Bank credit is the main source of external finance for SMEs. When SMEs face a negative shock to bank credit supply they become even more financially constrained, unless they manage to fill the gap with other sources of finance. We study the probability of credit substitution in pre-crisis, crisis, and post-crisis years. We expect the credit quality of firms to be an important factor that influences firms’ ability to compensate for a decrease in bank credit with trade credit. Moreover, we will study interaction effects with firm size, firms’ level of financial constraints and benchmark the results with matched bank-firm data from Spain. The results will generate direct implications for SME finance and economic policy. The study will be based on large-scale international micro data on SMEs.
Project 3: Information sharing, access to small business finance and loan outcomes
Researchers: Thorsten Beck (City University London, Cass Business School), Patrick Behr (FGV/EBAPE), Raquel de Freitas Oliveira (Banco Central do Brasil)
The main research question of this project is whether information sharing among banks increases access to small business finance and how it affects loan terms for SME borrowers. First, we will investigate if loan supply increases after banks have access to information about SME borrowers that they did not have previously. Second, we will investigate whether loan terms for the same borrowers change after the exogenous increase of borrower information. The study will also distinguish between repeat borrowers and new borrowers, borrowers with exclusive bank relationships and borrowers with multiple relationships and even between the effects on publics and private banks. An understanding of these issues will inform us about how information sharing impacts SMEs’ access to finance and the contract terms they are offered and, ultimately, how information sharing mechanisms should be designed to foster SME finance and economic development. The study will be based on Brazilian data.
Project 4: Credit information sharing and financing constraints
Researchers: Thorsten Beck (City University London, Cass Business School), Vlado Kysucky (Shenzhen University) and Lars Norden (FGV/EBAPE).
The main question of this project is whether and how the scale (breadth) and the scope (depth) of credit information sharing systems affect financing constraints of SMEs. Credit information sharing systems can reduce informational asymmetries between borrowers and lenders by pooling private information about the borrowers from multiple sources. On the one hand, greater credit information sharing can lead to greater availability of finance. On the other hand, the aggregate increase in credit information sharing can lead to credit rationing. We will study the variation in firms’ financing constraints before and after the introduction and/or changes of credit information sharing systems within and across countries. The findings will help to identify ways to improve SME finance through an improved design of credit information sharing systems. The study will be based on enterprise survey data from the Worldbank.