Public Development Banks and Credit Market Imperfections

43 Pages Posted: 18 Apr 2016

See all articles by Marcela Eslava

Marcela Eslava

University of the Andes (CEDE)

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2016


This paper is devoted to understanding the role of public development banks in alleviating financial market imperfections. We explore two issues: 1) which types of firms should be optimally targeted by public financial support; and 2) what type of mechanism should be implemented in order to efficiently support the targeted firms' access to credit. We model firms that face moral hazard and banks that have a costly screening technology, which results in a limited access to credit for some firms. We show that a public development bank may alleviate the inefficiencies by lending to commercial banks at subsidized rates, targeting the firms that generate high added value. This may be implemented through subsidized ear-marked lending to the banks or through credit guarantees which we show to be equivalent in "normal times". Still, when banks are facing a liquidity shortage, lending is preferred, while when banks are undercapitalized, a credit guarantees program is best suited. This will imply that 1) there is no "one size fits all" intervention program and 2) that any intervention program should be fine-tuned to accommodate the characteristics of competition, collateral, liquidity and banks capitalization of each industry.

Keywords: Costly screening, Credit rationing, Governmental loans and guarantees, Public development banks

JEL Classification: G20, G21, G23, H81

Suggested Citation

Eslava, Marcela and Freixas, Xavier, Public Development Banks and Credit Market Imperfections (March 2016). CEPR Discussion Paper No. DP11160. Available at SSRN:

Marcela Eslava (Contact Author)

University of the Andes (CEDE) ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976

Xavier Freixas

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom


Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005

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