Public development banks: Who to target and how?
Eslava, M.; Freixas, X.
Mayer, C.; Micossi, S.; Onado, M.; Pagano, M.; Polo, A.
Finance and investment: The European case
Oxford University Press
The market for credit to firms is believed to be plagued with imperfections that public development banks (PDBs) could alleviate, but it is not clear which market failures prevail, and which PDB activities are best suited to dealing with each of these failures. This chapter analyses one particular source of credit under-provision: the inability of banks to internalize the benefits of projects they might finance. A PDB may alleviate these credit inefficiencies by lending to commercial banks at subsidized rates or providing credit guarantees, targeting the firms that generate high added value as opposed to those with little credit history or low collateral. Direct lending by the PDB to the targeted industries could be superior to these subsidies to private lending, but only if the PDB's corporate governance is strong. Whether subsidies or guarantees are preferred depends on the presence or absence of liquidity shortages or banks' capital constraints.
Eslava, M.; Freixas, X.. Public development banks: Who to target and how?. In: Mayer, C.; Micossi, S.; Onado, M.; Pagano, M.; Polo, A.. Finance and investment: The European case. 1 ed. Oxford University Press; 2018. p. 289-298.