The Incentive Effects of Public Credit Guarantee Programs

Abstract

We examine the impact of public credit guarantees (PCGs) on bank behavior, using administrative data from one of the world’s largest PCG schemes. We find that PCG loans are substantially more likely to default after origination than non-PCG loans. We estimate that about a half of the difference in default rates can be explained by banks’ reluctance to make concessions to distressed borrowers when covered by government guarantees. A quasi-random policy intervention requiring PCG lenders to offer restructuring plans to distressed borrowers before the settlement of their guarantee claims has reduced (but not eliminated) the adverse effect of PCGs on restructurings. We also find that PCGs reduce bank information production (i.e., screening and monitoring) but do not lead them to make observationally riskier loans or engage in strategic adverse selection. Our findings have important implications for the efficient design of PCG schemes.

Keywords: credit guarantees, default, adverse selection, screening, monitoring, renegotiation, restructuring

JEL Classification: G21; G28; G33; H81