107 MARTINDALE CENTER FOR THE STUDY OF PRIVATE ENTERPRISE suggesting that emerging changes in credit allocation had not yet become sufficiently embedded to withstand a major shock like the pandemic. These programs show a consistent pattern: SMEs borrow when collateral barriers fall and rates drop, contradicting the alternative hypothesis that demand for credit is simply low among SMEs, thus providing evidence that inherited caution is a binding constraint. Although pandemic disruptions and macroeconomic fluctuations make it difficult to quantify any isolated impact, EU-backed instruments appear to function as stabilizers and access enhancers. Renewable energy as a benchmark for bankability The same dynamic is illustrated more sharply by Croatia’s renewable energy sector, where supply-side responses have been even more dramatic than in EU-backed SME lending. In early 2000s Croatia, few financial and policy mechanisms could guarantee long-run revenues from power generation projects, making it difficult for banks to model projects’ cash flows. Limited bank participation slowed development, with only one relatively small project built prior to 2007. In 2007, Croatia introduced a renewable feed-in tariff system, guaranteeing fixed power purchase prices for eligible projects (Uran & Krajcar, 2009). Combined with falling wind costs and grid development, this new stable revenue framework supported rapid investment in renewables in the 2010s, transforming Croatia from a state of minimal renewable energy generation to having nearly 1000 MW of wind capacity by the early 2020s (Croatian Energy Regulatory Agency, 2022). For reference, the pre-2007 project only contributed about 6 MW. Many of these projects were financed through blended structures involving private Croatian banks and development institutions like the European Bank for Reconstruction and Development and the EIB, allowing risk to be shared and isolated (Bajo et al., 2018). Although similar blended mechanisms have also brought growth in SME lending, the results have been less transformative as it is structurally more difficult to shield a portfolio from small business risks than from energy sector risks. Wind farms generate predictable revenue streams against physical assets with known values, and in this case, under a regulated tariff. Small business cash flows are not homogenous, often partially informal, and tied to local conditions that no head office model can capture. Subsidized rates and guarantees can substitute capital and reduce losses after defaults, but they can never replicate the predictability that makes wind so bankable. Hence, EU instruments cannot fully solve the access problem despite the very real support they provide. Counterfactuals and policy implications Loan officers working closely with local firms tend to have valuable qualitative information that cannot be derived from formal financial documents, such as a business’s reputation, stability of customer relationships, or seasonal cash flow patterns (Berger & Udell, 1995). That said, increasing local discretion makes it much harder for bank headquarters to monitor individual lending decisions and ensure that similar standards are applied across branches, increasing the risk that some loans are approved based on overly optimistic judgments or inconsistent criteria. In Croatia, where commercial banking is dominated by firms such as UniCredit and Erste Group, which operate under multinational supervisory frameworks, the scope for the relationship-based information of local branches to influence final outcomes tends to be minimal. EU regulatory integration exerts pressure through the tradeoff between access to credit and capital efficiency, which is particularly important in highly regulated systems. Banks are required to hold capital reserves proportional to the risk profile of their loan portfolios. Croatian banks must adhere to the EU Capital Requirements Regulation and Directive and are supervised by the European Central Bank Single Supervisory Mechanism, which monitors the use of these risk frameworks. Loans approved using standardized criteria and backed by adequate collateral are easier to assess and require less capital, while loans requiring local judgment and soft information are harder to model and explain to supervisors, even if they perform well. Consequently, nonstandard loans are treated as riskier, requiring banks to hold more capital in reserves. High reserves are costly, so banks are incentivized to restrict the volume of such loans, even when they are profitable. Given the high capital adequacy and conservative lending practices of most Croatian banks, the incentives to prioritize well-collateralized standardized lending are strong. Conclusion Croatia’s financial sector has emerged from its socialist-to-market transition a trusted, well-capitalized system integrated with European norms. However, the same forces that brought it stability also made it selective; ownership changes alone will not change that. Expanding the HBOR and HAMAG-BICRO loan guarantees could expand lending similarly to the wind power feed-in tariff and the quick take-up
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