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

would ensure clearer lines of accountability within firms. the objective of these proposals is to act as a driver for positive behaviours and the recognition of responsibilities of individuals. many regulated firms and their leaders behave ethically and honestly, and seek to drive effective cultures. however, where that is not the case, these reforms will constrain the ability of senior executives to escape accountability for wrongdoing. the reforms will require oireachtas consideration and approval, and we would welcome any questions you may have on our recommendations. the macro financial outlook during economic upswings, it is vital to build up financial and fiscal buffers : easing policies during downturns require corresponding restraint during expansion phases. the macroeconomic cycle ireland is currently in a phase of strong economic performance, which is driving a broad - based expansion in employment and an increase in earnings. our projections for the labour market indicate that the economy is moving towards full employment, although some extra capacity is possible through broader participation in the labour market. importantly, recent growth has not been fuelled by unsustainable increases in domestic credit or net financial inflows. while the current environment is positive, there are clear downside risks to the economy at both european and domestic levels. ireland is especially exposed due to the legacy of high public and private sector debt levels and the sensitivity of small and highly open economies to international shocks. an unexpected tightening in international financial conditions, relative to the benign environment that has been in place for an extended period of time, could induce an international slowdown in investment and consumption. shifts in international trade and tax regimes could adversely affect the irish business model, while a disorderly brexit would pose immediate challenges for the irish economy and financial system. as i stated in my pre - budget letter, the potential adverse impact on the irish economy and irish financial conditions if any of those scenarios were realised calls for the accumulation of financial and fiscal buffers that would help to limit the damage. in relation to financial sector buffers, in line with our mandate, the central bank is working to ensure that the capital positions of banks are sufficiently strong to withstand the losses that could be triggered by a negative shock. in particular, we recently activated the counter - cyclical capital buffer, which will require banks to maintain an extra buffer in relation to irish exposures. in a future cyclical downturn, this buffer can be released, which will help to avoid a damaging credit squeeze. in relation to fiscal buffers, the