soft information in lending may do better with SME lending. Petersen and Rajan (1994), for example, show how ties between a firm and its creditors affect the availability and cost of funds to the firm.

This importance of bank characteristics and banking markets also applies over time. It means that changes in banks’ and banking systems’ characteristics can drive the degree of access over time. As such, a panel of firm data combined with banking system characteristics becomes a very powerful tool to analyze financing constraints. Petersen and Rajan (1995), for example, study the effects of changes in banking system structures in the U.S. on small firms’ access to financing and find that the increase in competitiveness reduced the access to financing for small firms.

# **The Disequilibrium Approach**

We use a disequilibrium approach to investigate the determinants of credit demand, credit supply, and access to finance for small and medium firms in Brazil from 2003 to 2009. Cunha, de Jesus and Sakho (2011) estimation of the determinants of credit in Brazil over the 2000 to 2010 decade at the aggregate level shows that indeed for firms throughout the decade, credit is driven purely by supply factors for long periods of time, indicating that such disequilibrium model might be the right instrument to use to look at credit in Brazil. In addition, the paper points throughout the decade to long episodes of credit shortages for firms, where credit shortages arise when under prevailing interest rate, the quantity of credit demanded by agents is larger the quantity supplied by financial institutions.

Such shortages can arise both in equilibrium and in disequilibrium and both temporarily and in the long term. Disequilibrium could arise temporarily; when an economy is hit by exogenous shocks and price stickiness delay adjustments, so that rationing occurs during the transition to a new equilibrium. However, it can also be a long term feature, when there are permanent restrictions to price or quantity adjustments. For instance, shocks in Brazil that could further cause shortages in disequilibrium are related to Price Stickiness – Mild (average price duration in services - including financial services- around 5 months; . Aith (1998) discusses as examples of the “non-standard behavior” by courts that in Rio Grande do Sul, local judges rule on “limiting interest rates for loan contracts by banks to 12% (as defined in the Constitution), even though the Supreme Federal Court has established such cap depends on regulating.” Asymmetric information between borrowers and lenders can cause shortages in equilibrium, for instance in Stiglitz and Weiss (1981), the interest rate a bank charges may itself affect the riskiness of the pool of loans and the profit maximizing interest set by banks might differ from market clearing levels. In Brazil, asymmetric information is an issue. Until recently, public and private data banks used to contain only negative information (debtors in default) and there were no comprehensive credit record systems.(Beck 2000). In addition, Contract enforcement is another possible cause for shortages- Brazil’s judicial system scores considerably below countries in the upper middle income group as evidenced by cross-country indicators of contract enforceability. World Bank (1999) shows that there are 3,129 cases pending per judge in Sao Paulo, compared to only 58 in Singapore and 244 in Hungary. Pinheiro and Cabral (1999), a judicial execution to recover a creditor claim can take between 1 and 10 years. More recent evidence from Arida, Bacha, and Lara-Resende (2004) further argue that jurisdictional uncertainty is the main culprit linking the inexistence of local long-term domestic credit to the persistence of high short-term interest rates in Brazil. In particular, uncertainties associated to the settlement of contracts in the Brazilian jurisdiction are to blame. Gonçalves, Holland and Spacov (2007) using panel data find positive correlation-albeit not significant- between jurisdictional uncertainty and the level of short term real interest rate. They use a concept of jurisdictional uncertainty defined as an anti-saver and anti-creditor bias, which manifests itself as ''the risk of acts of changing the value of contracts before or at the moment of their execution, and as the risk of an unfavorable interpretation of the contracts in case of a court ruling.” 7