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Stijn Claessens Assistant Director, Financial Studies Division

Comments on: Public Initiative to Support Entrepreneurs: Credit Guarantees versus Co-Funding by Arping, Loranth and Morrison and Are Loan Guarantees Effective? The Case of Mexican Government Banks by Benavides and Huidobro. Stijn Claessens Assistant Director, Financial Studies Division

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Stijn Claessens Assistant Director, Financial Studies Division

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  1. Comments on:Public Initiative to Support Entrepreneurs: Credit Guarantees versus Co-Fundingby Arping, Loranth and Morrison and Are Loan Guarantees Effective? The Case of Mexican Government Banksby Benavides and Huidobro Stijn Claessens Assistant Director, Financial Studies Division Research Department, International Monetary Fund Conference on Partial Credit Guarantees World Bank, March 13/14, 2008

  2. General Comments • Topic little explored, theoretical or empirical • Nice papers, new theory and data usage • General comments • Do papers consider the (unique) role of government? • In papers little special about government • Much could be done by private sector, if given a subsidy? • What is optimal design of public support in general? • Like to know what is optimal, first best design of financial and other instruments given objectives, constraints, etc. • How do partial guarantees compare to other instruments? • Papers address some, but not all elements

  3. Arpin, Loranth and Morrison paper:Some corporate finance questions • Liability structure is a corporate finance question • Because of moral hazard and adverse selection corporations have specific debt-equity structures, short, long-term, banks versus bonds, covenants, etc • Also similar to optimal insurance contract design: deductibility, risk-sharing, premiums • Also means partial guarantees is one of many tools • Optimal financial structure for any firm can include partial guarantees, but also co-financing/-funding, Or for insurance: • Parallels suggest rich toolkit from which to draw optimal contracts for (partial) guarantees: extend work if possible

  4. Arpin, Loranth and Morrison paper:Broaden set of tools • Can one fit partial guarantee in overall financing • Does this means a pecking order of tools? Are there tradeoffs? • Is there an optimal, joint combination? Probably, since that is what we observe in most real corporate finance settings • Somewhat addressed, but can one model/quantify more general? • Adjust financial structures/guarantees to the issues • Nature of second-best should affect financial structure • E.g., sector, size, information, specific risks, inputs • Bring in government versus private sector • Is this a “standard” corporate finance? If not why does the presence of government make it special?

  5. Benavides and Huidobro: Framework • Framework not so clear • Why are banks risk-averse? Can one model the source: capital adequacy requirements, managerial, are diversification markets incomplete? • Is this (just) a matter of supply curve moving? If so, are there other ways, e.g., subordinated loan to the bank to lower risk? • Does framework tell about efficacy of guarantee? • Is this just a subsidy, but no leverage, or more? • Is the subsidy best given to the bank or to the borrower? • Minor: is break-even per unit or per program?

  6. Benavides and Huidobro: Data and Empirics • Many programs in Mexico • Why are only government banks in this business? • Are the programs coordinated in some way? Seems not • Data good, but with problems, not to be ignored • Aggregate analysis is mostly suggestive • Very hard to estimate credit demand functions, especially with aggregate data. Few degrees of freedom, 67 observations. Many other reforms and changes over period • There are other, better tests of presence of credit constraints • In any case, bank or firm level analysis better • Would help provide answers to: targeting, additionality, etc. • If can not, could still consider overall crowding out of fiscal

  7. How to model the best approach in general for these problems? • Define objective • Economic, social or political (economy)? • Static or dynamic? • Is government unique relative to private sector? • If truly public goods in light of market failures (which?) • If better at enforcement, information (?) • If better at building institutional environment, dynamically aided through guarantees • If not unique, or facing institutional and political economy constraints • How can guarantees best be done by private sector/contract? • Is it (just) a question of how to optimally use a given amount of public funds for a certain objective?

  8. Can one model the best designs? • What is then the best design given objectives, government and private sector constraints? • Auction of guarantees • Support for financial intermediaries • Subsidy to borrower • Co-financing or co-funding • Insurance type products • Risk-sharing • Guarantees, partial, full • Etc. etc.

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