Partial Credit Guarantee Schemes – around the world and here in Washington As reported earlier, March 13 and 14 saw an interesting conference on Partial Credit Guarantee Schemes, co-sponsored by the Rensselaer Institute and the Journal of Financial Stability.
A variety of papers considered conceptual and theoretical aspects of these schemes, while others evaluated specific schemes, including in Chile, Italy, Japan, Mexico, Nigeria, UK, and the U.S. Two panel discussions complemented the paper presentations and discussions, one composed of practitioners with experiences from different regions of the world, the other of policy makers and advisers to policy makers. So, what were the main findings of the conference?
We learned that credit guarantees have become the direct intervention mechanism of choice of SME credit activists. Almost all of the OECD countries have them, as well as many developing countries. Multi-lateral and bi-lateral donors support them throughout the developing world. While government is heavily involved in funding and management of these schemes, loan assessment and recovery are mostly undertaken by the private sector; which is, perhaps, for the better, as schemes where the government is in charge of choosing borrowers and recovering loans typically have higher loan losses. There is a surprisingly low use of risk-based pricing and limited use of risk management mechanisms. And finally we learned that the title of the conference might be a misnomer, as many schemes around the world are actually full rather than partial credit guarantee schemes.
What is the success criterion for credit guarantee schemes? Additionality was the buzzword in the room, i.e. extending lending both along the extensive and intensive margins to disadvantaged groups such as small enterprises. But measuring additionality is a challenging task, as both researchers and practitioners agreed. Where researchers have a control group of non-guaranteed borrowers, the task becomes somewhat easier and examples from Italy seem to indicate that guarantee schemes can lower the financing costs for borrowers. With regard to default rates, there are opposing effects in play – on the one hand, they might be higher, since the guarantee scheme is trying to target marginal and riskier clients; on the other hand, proper risk sharing between lender and guarantor or the informational advantages of the guarantor, as in the case of the Italian Mutual Credit Guarantee Consortia, might reduce the default of guaranteed vis-à-vis non-guaranteed borrowers. Credit guarantee schemes might also help stabilize an economy, as the examples for the U.S. and Japan showed. Especially interesting is the case of Japan, where a special government guarantee program seems to have crowded in non-guaranteed lending, but with massive risk shifting from both zombie borrowers and lenders to the government.
One of the question the final panel addressed was whether there are parallels of credit guarantees with deposit insurance. While there are certainly differences between the two, beyond the fact that they refer to different sides of banks’ balance sheets, Charles Calomiris from Columbia University cited several historical examples where each of them led to large-scale financial crises. And political capture features large among the risks, as pointed out by Teresa Graham, who had reformed the UK scheme some years ago, only to see politicians undo some of those reforms a few days ago. And both credit guarantee and deposit insurance schemes have one politically attractive feature in common – they require little initial cash outlay and they seem market-friendly tools. On the other hand, practitioners pointed to several examples where credit guarantee schemes have helped deepen capital markets and jumpstart SME lending. So, the devil is again in the detail of incentive compatible organizational, funding and pricing structure.
Where do we go from here? To make an adequate assessment of the trade-off between additionality and risk and the cost-effectiveness of credit guarantee schemes there is need for more data at the level of individual borrowers and banks as well as at national level. There is also a need for more work to develop credible identification strategies for using the data to analyze the empirical relationships. More could be done to find control groups to match the treatment groups, or to exploit specific policy changes for identification. Certainly a rich agenda for researchers and lots to talk about with practitioners and policy makers in future conferences.
Join the Conversation