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.

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

A few caveats Data is from BEEPS, so may not reflect conditions at height of credit boom Also may not reflect conditions now

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 (?)

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

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

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

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

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 )

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

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?