patrick honohan : does credit matter for the sme? opening address by mr patrick honohan, governor of the central bank of ireland, to the central bank conference on the sme lending market, dublin, 2 march 2012. * * * access of smes to credit and other financial services is a perennial topic for policymakers, besieged – as they often are – by frustrated entrepreneurs who, whether wishing to expand or dodging closure, are unable to access the credit necessary to do so. the pat answer traditionally offered by market fundamentalists to the effect that, if creditworthy, the business would have secured financing from eager and shrewd financiers, wears thinner these days after we have seen the consequences of massive credit misallocation. indeed there are fundamental reasons why – even in the non - crisis environment – even well - run small and medium enterprises whose likelihood of creating loan losses are low nevertheless don ’ t get credit. information is the key. a key societal function of banks and other financiers is the gathering and processing of the information necessary to make good loan decisions and to continue monitoring the performance of borrowers, intervening promptly where necessary to protect the sums advanced. but gathering and processing that information is not cheap or easy, especially when the economy is changing gears and the external environment is uncertain, as it is now. does credit matter for the sme? a large body of empirical evidence internationally says “ yes ”, noting that access to finance can promote new firm entry, firm growth, innovation, the achievement of optimal firm size and risk reduction. furthermore, well - financed small firms contribute significantly to broader economic growth. admittedly, the much vaunted capacity of small firms to create employment is also matched by an above - average incidence of job destruction : much of the churn in any economy happens in small firms. it ’ s not a question, though, of whether big or small is best for growth ; both are key. but the effectiveness of a financial system in catering for firm needs is best evidenced by its capacity to serve small firms ; big firms can find their needs catered for even in poorly developed financial systems. it is, of course, possible to over - emphasize the importance of credit in the economy. not only have we seen how too much credit can have devastating effects when it is proved to have financed wasteful or pointless projects. and, on the other hand, a number of countries have experienced ( in recent decades ) post

of realigning, the uk dropped out of the ems. the result was a depreciation which was twice as large as it would have been in a realignment. these were the tensions inherent in the ems and its narrow exchange rate bands...... which ultimately led to the bands being enlarged to 15 per cent in august 1993. weidmann : i can very well remember where i was when i heard the news : in new york city. on times square i saw a large digital billboard with a ticker announcing the news. that was bis central bankers ’ speeches a crucial turning point for me. the way i had perceived it, the path towards european integration had up until then always been pointing in one direction : towards greater integration. however, the tensions in the system were now patently obvious. schlesinger : at all events, with these bands, proposed by france upon our advice, the ems functioned smoothly up until the introduction of the euro. in 1990, the bundesbank wrote that the participants in economic and monetary union would be inextricably linked to one another “ come what may ” and that such a union would be an “ irrevocable joint and several community which, in the light of past experience, requires a more far - reaching association, in the form of a comprehensive political union, if it is to remain durable ”. weidmann : the assessment at that time merely reflected the bank ’ s long - held position. as early as 1963, president karl blessing had stated that the introduction of monetary union should be conditional on political union. the bank ’ s stance has not only been consistent over time but has, in fact, taken on even greater relevance in a dramatic way owing to the recent crisis in the euro area. political union did not feature in the maastricht treaty at the end of 1991. how did the central bank council react to this? schlesinger : when i took office as president of the deutsche bundesbank in the summer of 1991, chancellor helmut kohl was still in favour of political union. however, the decision to implement monetary union by no later than 1999 was taken just four months later. this was a clear defeat for us. there is no other way of putting it. we had assumed that the treaty would be concluded with a definition of the entry criteria, but without a fixed date being set. weidmann : it is interesting that we are having a similar discussion now in