On the Impact of Government Credit Guarantees Programs on Firms' Access to Credit and Performance during the Financial Crisis

Topic and Objectives

This project aimed to evaluate the degree to which credit guarantee programs help mitigate the real effects of the financial crisis by alleviating credit constraints on creditworthy firms using the Dutch credit guarantee program, MKB Borgstellingskrediet. The characteristics of the Dutch guarantee program, along with changes to the program during the sample period, provide an interesting setting for studying the impact of such programs on credit availability, bank and firm behavior, and subsequent firm performance.

The use of government credit guarantee schemes to facilitate small and medium-sized enterprises’ (SMEs) access to credit is widespread in the European Union and other developed and emerging markets (Beck, Klapper, Mendoza, 2010). Although the extension of credit guarantee schemes was an important policy measure to prevent a credit crunch in the SME lending during the financial crisis, empirical evidence on the effectiveness of these policies remains sparse.

Under the Dutch guarantee scheme, qualifying firms can apply for a government guarantee loan. The decision to evaluate and originate the guarantee loans remains with the bank. To mitigate moral hazard concerns, the bank cannot obtain a credit guarantee for the full amount of the loan (i.e., a guarantee loan is essentially co-financed between the government and the bank). The maximum fraction of the loan that can be guaranteed by the government varies significantly across groups of firms and time. This variation combined with detailed loan application data from one of the largest Dutch banks allows us to study the impact of such guarantee programs during the crisis period.

The authors used this variation to study several related questions: (a) Do credit guarantees increase banks’ willingness to lend to SMEs and if so by how much? (b) Which firms benefit the most (e.g., young firms without prior access to bank debt, existing bank customers, customers of other banks, high qualify firms with insufficient collateral, poor quality firms with stained credit histories)? (c) What do they use this credit for? (d) Do firms that obtained a credit guarantee loan exhibit a superior or an inferior subsequent performance relative to their peers? Results on (a), (b) and (c) could provide insights about the degree to which credit guarantee programs increased firms’ access to bank credit alleviating credit constraints during the financial crisis and which firms benefited the most.

Key Findings

• The results show that the expansion of the guarantee program in March 2010, and the later contraction in January 2012, both have a large effect on the number of loan applications under the guarantee scheme. Next, in a difference-in-differences empirical setting, we evaluate the impact of the reform on treated firms (those borrowers for whom the maximum guarantee increased to 80 percent in 2010) relative to the control group of firms. The reform encourages treated firms to apply for new credit, relative to control firms. Conditional on applying, the number of loans of eligible firms increases after the guarantee expansion.
• We find that the fraction of the loan guaranteed increases, while the fraction of the loan collateralized by the borrower decreases for treatment borrowers. Strikingly, the coverage ratio (defined as the ratio of collateral value over total exposure) remains constant, which suggests a possible substitution effect whereby banks accept less inside collateral from firms and substitute it with government guarantees. Since guarantee loans substitute for personal guarantees and outside collateral (as opposed to inside collateral), guarantees that reduce commitment from borrowers have a detrimental impact on the signaling role of collateral.

Policy Implications 

The authors show that the expansion of a credit guarantee program has positive effects on access to credit. Perhaps unsurprisingly, they also find that shifting risk away from lenders and borrowers towards the government provides incentives that result in unintended consequences, consistent with moral hazard. The degree to which these positive effects outweigh the potential negative effects remains to be seen in the Netherlands, but policymakers should carefully consider both forces when designing public credit guarantee programs in the future. Policymakers could use the outcomes of this paper to increase the effectiveness of credit guarantee policies around the world.