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Partial Credit Guarantees: Experiences and Lessons March 13-14 World Bank. World Bank. Comments on Session IV: Partial Credit Guarantees and Loan Contract Juan Carlos Mendoza Sr. Financial Economist World Bank. Credit Rationing. Why are firms targeted by PCGs experiencing credit rationing?.
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Partial Credit Guarantees: Experiences and LessonsMarch 13-14 World Bank World Bank Comments on Session IV: Partial Credit Guarantees and Loan Contract Juan Carlos Mendoza Sr. Financial Economist World Bank
Credit Rationing Why are firms targeted by PCGs experiencing credit rationing? InformationAsymmetry Other Higher Risk Opaqueness E.g., poor financial statements • Volatility of default rate • Not necessarily the Expected Loss EL = Exposure x Probability of Default x Loss Given Default “Rich tapestry of factors” PCGs are not meant to solve this !!! These two papers are ultimately motivated by the fundamental question: What problem are PCGs seeking to solve?
Marc Cowling uses a dataset of borrowers who used PCGs after having been refused debt finance by other sources • Was credit rationing alleviated? • Analysis of price stickiness and its implication for credit rationing • Berger and Udell (1992) do not see it as sufficient evidence of rationing • The author finds significant stickiness • Higher for nominal than real rates • Similar for commitment and non-commitment loans • This is particularly puzzling: information asymmetries are not fundamental determinants of rate stickiness • Suggests that stickiness of rates could be driven by issues related to market power • Not higher for riskier loan • Again this suggests issues related to market power • Banks may be unable to do risk-based pricing
While the evidence is mixed, Cowling suggest that there is no evidence of credit rationing in the sample • The determinant factor is that when base rates increase, the probability of a loan being made under commitment actually decreases • It would be interesting to explore certain shortcomings related to this approach to investigating credit rationing • Relative market power may not allow rationing to take place under the backward bending supply of credit model There may be alternative ways to investigate the role that PCGs have on solving credit rationing problems . . .
. . . and Mutual PCG funds are an excellent model to analyze credit rationing drivers as Columba and his colleagues show Mutual PCGs: Increase supply of credit by lowering costs to banks Universe ofPotential Borrowers Screening & Monitoring ProductDistribution ExpectedLoss BankCustomers I share losseswith you I know them I bring themto you
Columba and his colleagues use data on 263,000 small Italian enterprises with an overdraft loan in June 2005 • About 17 percent of these had a Mutual PCG • Question: Do firms with mutual PCGs have, ceteris paribus, lower interest rate financing? • Answer: Yes • By about 20 bp • This is even more important in regions where the information asymmetry is hypothesized to be higher • Smaller firms and those which have a single bank relationship have higher interest rates • Real guarantees lower interest rates • Firms with Mutual PCGs also have a lower probability of default
The authors also highlight a series of issues that warrant additional analysis Mutual PCGs: Open Questions • How “mutual” is the capital base? • Not much • Only about a third of the capital is put by members • What are the implications of this? • Positive signaling: Ability to raise additional funds • Negative signaling: Possible political interference Screening & Monitoring ProductDistribution ExpectedLoss • The fact that interest rates increase with Mutual PCG size suggest the importance of this factor • What about the adverse impact on diversification • But in the long term, shouldn’t information asymmetry level converge in banks and mutual PCGs? • Particularly if coverage ratio decreases • Could this be the main benefit? • Interesting to compare with trade associations that do not provide any type of guarantees or monitoring but negotiate “bulk” prices