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Credit Guarantees and Loan Contracts

Credit Guarantees and Loan Contracts. Cowling: The Role of Loan Guarantee Schemes in Alleviating Credit Rationing in the UK Columba, Gambacorta and Mistrulli: Firms as Monitors of other Firms: Mutual Loan Guarantee Consortia and SME Finance Comments by Thorsten Beck. Some general remarks.

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Credit Guarantees and Loan Contracts

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  1. Credit Guarantees and Loan Contracts Cowling: The Role of Loan Guarantee Schemes in Alleviating Credit Rationing in the UK Columba, Gambacorta and Mistrulli: Firms as Monitors of other Firms: Mutual Loan Guarantee Consortia and SME Finance Comments by Thorsten Beck

  2. Some general remarks • General theme: effect of partial credit guarantees on loan contract conditions, specifically interest rates • Cowling: Do credit guarantee help reduce interest rate stickiness? • Columba et al.: do mutual guarantees help lower interest rates and default

  3. UK vs. Italy – what do we learn about guarantee schemes? • Small Firms Loan Guarantee Scheme: government financed and managed, premium paid by borrower, limited to small enterprises • Mutual Loan Guarantee Consortia: “a group of SMEs, linked by joint liability. Each SME contibutes to a guarantee fund that is used as collateral to loans granted to MLGC members.” Resembles microfinance group-lending, but there is third-party funding involved. Seems to be classical case of market-based guarantee scheme

  4. Some comments on Cowling • Carefully-executed firm-level study, building on previous US-based work and well grounded in literature • Using tests of interest rates stickiness, paper shows that there is limited evidence of credit rationing among small businesses in the UK • This is not a direct test, since there is no control group of non-guaranteed loans • Test of price effect, but what about volume? • Proportion tests: is there a selection/composition problem here?

  5. Some comments on Columba et al. • Carefully-executed firm-level study, including control group of non-guaranteed borrowers • Guaranteed firms pay lower interest rates and have lower default rates, with effects being bigger in South • The economic effect of guarantees does not seem very big • Is there a selection bias? • Is there any additionality effect? • Guarantees vs. cooperative banks – which one is the more cost-effective mechanism?

  6. Looking forward • Both: are guarantees cost-effective instruments? • Both: what are the real effects of guarantees? • Cowling: Expand analysis to include a control group • Columba et al.: What is the role of government in funding? Use cross-MLGC variation to assess optimal guarantee design

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