Government Loan Guarantees, Market Liquidity, and Lending Standards

61 Pages Posted: 3 Mar 2020 Last revised: 27 May 2022

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR); Systemic Risk Centre - LSE; Halle Institute for Economic Research

Martin Kuncl

Government of Canada - Bank of Canada

Date Written: March 2020

Abstract

We study third-party loan guarantees in a model in which lenders can screen, learn loan quality over time and can sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity and reduce lending standards, with a positive overall welfare effect. Guarantees improve the average quality of non-guaranteed loans traded and thus the market liquidity of these loans due to both selection and commitment. Because of this positive pecuniary externality, guarantees are insufficient and should be subsidized. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac.

Keywords: Adverse Selection, Government Sponsored Enterprises, market liquidity, Mortgage guarantees, Pecuniary externality, Pigouvian subsidy

JEL Classification: G01, G21, G28

Suggested Citation

Ahnert, Toni and Kuncl, Martin, Government Loan Guarantees, Market Liquidity, and Lending Standards (March 2020). CEPR Discussion Paper No. DP14458, Available at SSRN: https://ssrn.com/abstract=3547391

Toni Ahnert (Contact Author)

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Systemic Risk Centre - LSE ( email )

London
United Kingdom

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Martin Kuncl

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
232
PlumX Metrics