In a credit crunch, high-growth firms will do just fine, a study by the Hellenic Observatory suggests. The researchers, Sophia Dimelis, Ioannis Giotopoulos and Helen Louri, found that less access to bank credit did not hinder economic recovery even after a long and far-reaching recession.
The findings concluded that
- As expected, financial stability favors growth, while instability hobbles it;
- the more powerful the banking industry is in a country, the more businesses will have trouble growing across the board, however,
- the top ten percent of fastest-growing firms continue to grow regardless, while slower-growing or smaller firms will be adversely affected.
When credit is tighter, banks will hedge their bets by focusing on the businesses that seem like the most trustworthy borrowers. This means that high-performing, fast-growing companies will be able to access a much larger share of the credit pool, so they’ll have easier access to credit even as the overall amount of credit available shrinks.
But some credit crunches affect all companies, regardless of quality. This forces businesses to look for alternate funding sources, like venture capital or angel investors. Access to foreign banks, who can offer more diverse sources of funding, can also provide stability. In this kind of credit crunch, companies (and industries as a whole) that are less dependent on banks and more resourceful will emerge. They can then play a role in helping the economy bounce back in what the paper calls a “credit-less recovery.”
In conclusion, in a credit crunch, where lenders are risk-averse, high-performing companies thcontinue to thrive–not so for the smaller fry.
Read the full report here.
Contributed by Emily Lever.