Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program

Author Name ONO Arito (Bank of Japan) / UESUGI Iichiro (Senior Fellow, RIETI / Hitotsubashi University) / YASUDA Yukihiro (Tokyo Keizai University)
Creation Date/NO. March 2011 11-E-035
Research Project Study Group on Changes in Financial and Industrial Structures
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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 is a relationship lender (main bank) that extends an ECG loan, the increased availability is 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 deteriorates 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 extends ECG loans. Our findings suggest that close firm-bank relationships may have perverse effects on the efficacy of public credit guarantees.

Published: Arito Ono, Iichiro Uesugi, Yukihiro Yasuda, 2013. "Are lending relationships beneficial or harmful for public credit guarantees? Evidence from Japan's emergency credit guarantee program," Journal of Financial Stability, Vol. 9(2), pp. 151-167.