The financing of innovative activities by banking institutions: policy issues and regulatory options

Ughetto, Elisa (2006): The financing of innovative activities by banking institutions: policy issues and regulatory options.

Abstract

The paper investigates to what extent the convergence of banks over risk-adjusted capital standards set by the new Basel Capital Accord may affect the way in which they screen innovative firms. It also gives an overview of the existing forms of credit support to R&D activities. The study is built upon a survey conducted in January and February 2006 on 12 main Italian banking groups. The survey provides interesting insights on the use of non-financial parameters to assess the creditworthiness of potential borrowers and on the architecture of internal rating systems in the light of Basel II requirements. Results suggest that the majority of banks does not consider intangibles as meaningful determinants in credit risk assessment. This could imply that the sole implementation of the Accord might not lead to reduce informational asymmetries between lenders and borrowers as it could be expected. However, such an effect could be compensated by specific measures provided by single financial intermediaries.

• Item Type: MPRA Paper
• Language: English
• Keywords: internal rating systems; innovation financing; Basel II
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

ABI, Albo dei gruppi bancari: struttura, movimentazione e dati di bilancio, June 30th 2005

Altman, E. I., Saunders, A., 1998. Credit risk measurement: developments over the last 20 years. Journal of Banking and Finance 21, 1721-1742

Arrow, K., 1962. Economic welfare and the allocation of resources for invention, in: Nelson, R., The rate and direction of incentive activity: economic and social factors, Princeton University Press.

Banca d’Italia, 2000. Modelli per la gestione del rischio di credito. I “ratings” interni. Tematiche istituzionali, April 2000

Basel Committee on Banking Supervision, 2000. Range of practice in banks’ internal rating systems. Discussion paper, January

Basel Committee on Banking Supervision, 2004. International Convergence of Capital Measurement and Capital Standards. Bank of International Settlements.

Beaver, W., 1966. Financial ratios as predictors of failure. Journal of Accounting Research 4, 71-102

Bester, H., 1985. Screening vs. rationing in credit markets with imperfect information, American Economic Review 75, 850-855.

Bhattacharya, S., Ritter, J.R, 1983. Innovation and communication: signaling with partial disclosure. The Review of Economic Studies 50, 331-346

Brunner, A., Krahnen, J.P., Weber, M., 2000. Information Production in credit relationships: on the role of internal ratings in commercial banking. Working paper n. 2000/10, Center for Financial studies, Frankfurt am Main

Caňibano, L., García-Ayuso, M., Sanchez, P., 2000. Accounting for intangibles: a literature review. Journal of Accounting Literature 19, 102-130

Carey, M., 2001. Some evidence on the consistency of banks’ internal credit ratings. Working paper, Federal Reserve Board

Carpenter, R., Petersen B., 2002. Capital market imperfections, high-tech investment and new equity financing. Economic Journal 112, 54-72.

Crouhy, M., Galai, D., Mark, R., 2001. Prototype risk rating system. Journal of banking and Finance 25, 47-95

Daily, C., Dalton, D., 1994. Corporate Governance and the bankruptcy firm. Strategic Management Journal 37 (6), 1603-1617

D’Aveni, R., 1989. Dependability and organizational bankruptcy: an application of agency and prospect theory. Management Science 35 (9), 1120-1138

De Laurentis, G., Saita, F., 2004. Rating interni e controllo del rischio di credito: Esperienze, problemi, soluzioni. Bancaria Editrice, Rome

El Hennawy, R., Morris, R., 1983. The significance of base year in developing failure prediction models. Journal of Business Finance and Accounting 10, 209-223

Elsas, R., Krahnen, J.P., 1998. Is relationship lending special? Evidence from credit-file data in Germany, Journal of Banking and Finance 22, 1283–1316

Encaoua, D., Laisney, F., Hall, B.H., Mairesse, J., 2000. Economics and econometrics of innovation. Kluwer, Amsterdam

English, W.B., Nelson, W.R., 1999. Bank risk rating of business loans, in: Proceedings of the 35th Annual Conference on Bank Structure and Competition, May 1999.

Foster, G., 1986. Financial Statements Analysis. Prentice-Hall, London

Grunert, J., Norden, L., Weber, M., 2005. The role of non-financial factors in internal credit ratings. Journal of Banking and Finance 29, 509-531

Hall, B., 2002. The financing of research and development. Oxford Review of Economic Policy 18 (1), 35-51.

Izan, H.Y, 1984. Corporate distress in Australia. Journal of Banking and Finance 8, 303-320

Jaffee, D., Russel T., 1976. Imperfect information, uncertainty and credit rationing. The Quarterly Journal of Economics 90, 651-666

Keasey, K., Watson, R., 1987. Non financial symptoms and the prediction of small company failure. Journal of Business Finance and Accounting 14, 353-355

Krahnen, J.P., Weber, M., 2001. Generally accepted rating principles: a primer. Journal of Banking & Finance 25, 3-23

Laitinen, E., 1993. The use of information contained in annual reports and prediction of small business failure. International Review of Financial Analysis 3

Lev, B., 2001. Intangibles: Management, Measurement and Reporting. Brookings Institution Papers, Washington D.C.

Machauer, A., Weber, M., 1998. Bank behavior based on internal credit ratings of borrowers. Journal of Banking and Finance 22, 1355-1383

Mensah, Y., 1984. An examination of the stationarity of multivariate bankruptcy prediction models: a methodological study. Journal of Accounting Research 22/1, 380-395

Nelson, R., 1959. The simple economics of basic scientific research. Journal of Political Economy 49, 297-306.

Platt, H.D., Platt, M.B, 1990. Development of a class of stable predictive variables: the case of bankruptcy prediction. Journal of Business Finance and Accounting 17 (1), 31-51

Platt, H.D., Platt M.B, 1991. A note on the use of industry-relative ratios in bankruptcy prediction. Journal of Banking and Finance 15, 1183-1194

Rose, P.S., Andrews, W.T., Giroux, G.A., 1982. Predicting business failure: a macroeconomic perspective. Journal of Accounting and Finance 6/1, 20-31

Santomero, A.M., 1997. Commercial bank risk management: an analysis of the process. Journal of Financial Services Research 12, 83-115

Stiglitz, J., Weiss, A., 1981. Credit rationing in markets with imperfect information. American Economic Review 71, 393-410.

Szegö, G., Varetto, F., 1999. Il rischio creditizio. Misura e controllo., Utet, Torino

Tabakis, E., Vinci, A., 2002. Analysing and combining multiple credit assessments of financial institutions. Working paper n. 123, European Central Bank

Tennyson, B.N, Ingram, R.W, Dugan, M.T., 1990. Assessing the information content of narrative disclosures in explaining bankruptcy. Journal of Business Finance and Accounting 17/3, 391-410

Treacy, W.F, Carey M., 2000. Credit risk rating systems at large US banks. Journal of Banking and Finance 24, 167-201

Udell, G.F, 1989. Loan quality, commercial loan review, and loan officer contracting. Journal of Banking and Finance 13, 367-382

Zopounidis, C., 1987. A multicriteria decision making methodology for the evaluation of the risk of failure and an application. Foundations of Control Engineering 12/1,45-67

ABI, Albo dei gruppi bancari: struttura, movimentazione e dati di bilancio, June 30th 2005

Altman, E. I., Saunders, A., 1998. Credit risk measurement: developments over the last 20 years. Journal of Banking and Finance 21, 1721-1742

Arrow, K., 1962. Economic welfare and the allocation of resources for invention, in: Nelson, R., The rate and direction of incentive activity: economic and social factors, Princeton University Press.

Banca d’Italia, 2000. Modelli per la gestione del rischio di credito. I “ratings” interni. Tematiche istituzionali, April 2000

Basel Committee on Banking Supervision, 2000. Range of practice in banks’ internal rating systems. Discussion paper, January

Basel Committee on Banking Supervision, 2004. International Convergence of Capital Measurement and Capital Standards. Bank of International Settlements.

Beaver, W., 1966. Financial ratios as predictors of failure. Journal of Accounting Research 4, 71-102

Bester, H., 1985. Screening vs. rationing in credit markets with imperfect information, American Economic Review 75, 850-855.

Bhattacharya, S., Ritter, J.R, 1983. Innovation and communication: signaling with partial disclosure. The Review of Economic Studies 50, 331-346

Brunner, A., Krahnen, J.P., Weber, M., 2000. Information Production in credit relationships: on the role of internal ratings in commercial banking. Working paper n. 2000/10, Center for Financial studies, Frankfurt am Main

Caňibano, L., García-Ayuso, M., Sanchez, P., 2000. Accounting for intangibles: a literature review. Journal of Accounting Literature 19, 102-130

Carey, M., 2001. Some evidence on the consistency of banks’ internal credit ratings. Working paper, Federal Reserve Board

Carpenter, R., Petersen B., 2002. Capital market imperfections, high-tech investment and new equity financing. Economic Journal 112, 54-72.

Crouhy, M., Galai, D., Mark, R., 2001. Prototype risk rating system. Journal of banking and Finance 25, 47-95

Daily, C., Dalton, D., 1994. Corporate Governance and the bankruptcy firm. Strategic Management Journal 37 (6), 1603-1617

D’Aveni, R., 1989. Dependability and organizational bankruptcy: an application of agency and prospect theory. Management Science 35 (9), 1120-1138

De Laurentis, G., Saita, F., 2004. Rating interni e controllo del rischio di credito: Esperienze, problemi, soluzioni. Bancaria Editrice, Rome

El Hennawy, R., Morris, R., 1983. The significance of base year in developing failure prediction models. Journal of Business Finance and Accounting 10, 209-223

Elsas, R., Krahnen, J.P., 1998. Is relationship lending special? Evidence from credit-file data in Germany, Journal of Banking and Finance 22, 1283–1316

Encaoua, D., Laisney, F., Hall, B.H., Mairesse, J., 2000. Economics and econometrics of innovation. Kluwer, Amsterdam

English, W.B., Nelson, W.R., 1999. Bank risk rating of business loans, in: Proceedings of the 35th Annual Conference on Bank Structure and Competition, May 1999.

Foster, G., 1986. Financial Statements Analysis. Prentice-Hall, London

Grunert, J., Norden, L., Weber, M., 2005. The role of non-financial factors in internal credit ratings. Journal of Banking and Finance 29, 509-531

Hall, B., 2002. The financing of research and development. Oxford Review of Economic Policy 18 (1), 35-51.

Izan, H.Y, 1984. Corporate distress in Australia. Journal of Banking and Finance 8, 303-320

Jaffee, D., Russel T., 1976. Imperfect information, uncertainty and credit rationing. The Quarterly Journal of Economics 90, 651-666

Keasey, K., Watson, R., 1987. Non financial symptoms and the prediction of small company failure. Journal of Business Finance and Accounting 14, 353-355

Krahnen, J.P., Weber, M., 2001. Generally accepted rating principles: a primer. Journal of Banking & Finance 25, 3-23

Laitinen, E., 1993. The use of information contained in annual reports and prediction of small business failure. International Review of Financial Analysis 3

Lev, B., 2001. Intangibles: Management, Measurement and Reporting. Brookings Institution Papers, Washington D.C.

Machauer, A., Weber, M., 1998. Bank behavior based on internal credit ratings of borrowers. Journal of Banking and Finance 22, 1355-1383

Mensah, Y., 1984. An examination of the stationarity of multivariate bankruptcy prediction models: a methodological study. Journal of Accounting Research 22/1, 380-395

Nelson, R., 1959. The simple economics of basic scientific research. Journal of Political Economy 49, 297-306.

Platt, H.D., Platt, M.B, 1990. Development of a class of stable predictive variables: the case of bankruptcy prediction. Journal of Business Finance and Accounting 17 (1), 31-51

Platt, H.D., Platt M.B, 1991. A note on the use of industry-relative ratios in bankruptcy prediction. Journal of Banking and Finance 15, 1183-1194

Rose, P.S., Andrews, W.T., Giroux, G.A., 1982. Predicting business failure: a macroeconomic perspective. Journal of Accounting and Finance 6/1, 20-31

Santomero, A.M., 1997. Commercial bank risk management: an analysis of the process. Journal of Financial Services Research 12, 83-115

Stiglitz, J., Weiss, A., 1981. Credit rationing in markets with imperfect information. American Economic Review 71, 393-410.

Szegö, G., Varetto, F., 1999. Il rischio creditizio. Misura e controllo., Utet, Torino

Tabakis, E., Vinci, A., 2002. Analysing and combining multiple credit assessments of financial institutions. Working paper n. 123, European Central Bank

Tennyson, B.N, Ingram, R.W, Dugan, M.T., 1990. Assessing the information content of narrative disclosures in explaining bankruptcy. Journal of Business Finance and Accounting 17/3, 391-410

Treacy, W.F, Carey M., 2000. Credit risk rating systems at large US banks. Journal of Banking and Finance 24, 167-201

Udell, G.F, 1989. Loan quality, commercial loan review, and loan officer contracting. Journal of Banking and Finance 13, 367-382

Zopounidis, C., 1987. A multicriteria decision making methodology for the evaluation of the risk of failure and an application. Foundations of Control Engineering 12/1,45-67