Secured Transactions Reform and Access to Credit

Secured Transactions Reform and Access to Credit

Elgar Financial Law series

Edited by Frederique Dahan and John Simpson

The chapters presented here provide, for the first time, a comprehensive and cutting-edge view of the subject – from both a legal and economic perspective. They start at the macro level of financial systems, moving towards the behaviours of lenders (commercial banks and micro-lenders), policy options for government and the mechanisms of collateral law reform.

Chapter 1: Turning the Key to Credit: Credit Access and Credit Institutions

Florencio Lopez-de-Silanes

Subjects: economics and finance, financial economics and regulation, law - academic, finance and banking law

Extract

Florencio Lopez-de-Silanes* 1.1 INTRODUCTION Access to credit is essential for individuals and firms. It is the largest source of finance across countries. But there are marked differences in credit access around the world: while New Zealand, the Czech Republic and Hungary have large credit markets and easy access to loans, Russia, Albania or Argentina do not. The poor credit conditions in many countries make it imperative to understand what explains credit access in a world context and to draw attention to successful strategies. In this chapter we focus on understanding the institutional framework for credit that is required to support access, and present the empirical evidence on the link between those institutions and credit markets. Understanding and assessing the effects of the institutions that impact this market may be essential to unlock the key to credit. As summarized in Djankov et al. (2007), there are two broad views about the institutions that impact private credit. The ‘information’ view argues that the prevalence of asymmetric information in financial markets, in the form of adverse selection or moral hazard, prevents an efficient allocation of lending (see for example Stiglitz and Weiss 1981, Pagano and Jappelli 1993 and Jappelli and Pagano 1999 and 2002). The implication is that better institutions that fill up the information gap between lender and borrower should lead to deeper credit markets and better financing terms for firms and individuals. An alternative, although not necessarily opposite view, focuses on the prevalence of agency problems in lending...

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