Comments on:Comments on:

Public Initiative to Support Public Initiative to Support Entrepreneurs: Credit Entrepreneurs: Credit

Guarantees versus Co-FundingGuarantees versus Co-Fundingby Arping, Loranth and Morrison by Arping, Loranth and Morrison

and and

Are Loan Guarantees Effective? Are Loan Guarantees Effective? The Case of Mexican The Case of Mexican Government BanksGovernment Banks

by Benavides and Huidobroby Benavides and Huidobro Stijn ClaessensStijn ClaessensAssistant Director, Financial Studies DivisionAssistant Director, Financial Studies Division

Research Department, International Monetary Research Department, International Monetary FundFund

Conference on Partial Credit Conference on Partial Credit Guarantees Guarantees

World Bank, March 13/14, 2008World Bank, March 13/14, 2008

General CommentsGeneral Comments Topic little explored, theoretical or empirical Topic little explored, theoretical or empirical Nice papers, new theory and data usageNice papers, new theory and data usage General commentsGeneral comments

Do papers consider the (unique) role of government?Do papers consider the (unique) role of government? In papers little special about government In papers little special about government Much could be done by private sector, if given a Much could be done by private sector, if given a

subsidy?subsidy? What is optimal design of public support in general?What is optimal design of public support in general?

Like to know what is optimal, first best design of Like to know what is optimal, first best design of financial and other instruments given objectives, financial and other instruments given objectives, constraints, etc. constraints, etc.

How do partial guarantees compare to other How do partial guarantees compare to other instruments? instruments?

Papers address some, but not all elements Papers address some, but not all elements

Arpin, Loranth and Arpin, Loranth and Morrison paper:Morrison paper:

Some corporate finance Some corporate finance questionsquestions Liability structure is a corporate finance questionLiability structure is a corporate finance question

Because of moral hazard and adverse selection Because of moral hazard and adverse selection corporations have specific debt-equity structures, corporations have specific debt-equity structures, short, long-term, banks versus bonds, covenants, etcshort, long-term, banks versus bonds, covenants, etc

Also similar to optimal insurance contract design: Also similar to optimal insurance contract design: deductibility, risk-sharing, premiumsdeductibility, risk-sharing, premiums

Also means partial guarantees is one of many Also means partial guarantees is one of many toolstools Optimal financial structure for any firm can include Optimal financial structure for any firm can include

partial guarantees, but also co-financing/-funding, Or partial guarantees, but also co-financing/-funding, Or for insurance:for insurance:

Parallels suggest rich toolkit from which to draw Parallels suggest rich toolkit from which to draw optimal contracts for (partial) guarantees: extend work optimal contracts for (partial) guarantees: extend work if possibleif possible

Arpin, Loranth and Arpin, Loranth and Morrison paper:Morrison paper:

Broaden set of toolsBroaden set of tools Can one fit partial guarantee in overall financingCan one fit partial guarantee in overall financing

Does this means a pecking order of tools? Are there Does this means a pecking order of tools? Are there tradeoffs? tradeoffs?

Is there an optimal, joint combination? Probably, since that Is there an optimal, joint combination? Probably, since that is what we observe in most real corporate finance settingsis what we observe in most real corporate finance settings

Somewhat addressed, but can one model/quantify more Somewhat addressed, but can one model/quantify more general?general?

Adjust financial structures/guarantees to the issuesAdjust financial structures/guarantees to the issues

Nature of second-best should affect financial structureNature of second-best should affect financial structure E.g., sector, size, information, specific risks, inputsE.g., sector, size, information, specific risks, inputs

Bring in government versus private sectorBring in government versus private sector Is this a “standard” corporate finance? If not why does the Is this a “standard” corporate finance? If not why does the

presence of government make it special? presence of government make it special?

Benavides and Huidobro: Benavides and Huidobro: FrameworkFramework

Framework not so clearFramework not so clear Why are banks risk-averse? Can one model the Why are banks risk-averse? Can one model the

source: capital adequacy requirements, managerial, source: capital adequacy requirements, managerial, are diversification markets incomplete?are diversification markets incomplete?

Is this (just) a matter of supply curve moving? If so, Is this (just) a matter of supply curve moving? If so, are there other ways, e.g., subordinated loan to the are there other ways, e.g., subordinated loan to the bank to lower risk?bank to lower risk?

Does framework tell about efficacy of guarantee?Does framework tell about efficacy of guarantee? Is this just a subsidy, but no leverage, or more?Is this just a subsidy, but no leverage, or more? Is the subsidy best given to the bank or to the Is the subsidy best given to the bank or to the

borrower?borrower? Minor: is break-even per unit or per program?Minor: is break-even per unit or per program?

Benavides and Huidobro: Benavides and Huidobro: Data and EmpiricsData and Empirics

Many programs in Mexico Many programs in Mexico Why are only government banks in this business?Why are only government banks in this business? Are the programs coordinated in some way? Seems notAre the programs coordinated in some way? Seems not

Data good, but with problems, not to be ignoredData good, but with problems, not to be ignored Aggregate analysis is mostly suggestiveAggregate analysis is mostly suggestive

Very hard to estimate credit demand functions, especially Very hard to estimate credit demand functions, especially with aggregate data. Few degrees of freedom, 67 with aggregate data. Few degrees of freedom, 67 observations. Many other reforms and changes over periodobservations. Many other reforms and changes over period

There are other, better tests of presence of credit constraintsThere are other, better tests of presence of credit constraints In any case, bank or firm level analysis betterIn any case, bank or firm level analysis better

Would help provide answers to: targeting, additionality, etc.Would help provide answers to: targeting, additionality, etc. If can not, could still consider overall crowding out of fiscalIf can not, could still consider overall crowding out of fiscal

How to model the best How to model the best approach in general for approach in general for

these problems?these problems? Define objectiveDefine objective

Economic, social or political (economy)?Economic, social or political (economy)? Static or dynamic?Static or dynamic?

Is government unique relative to private sector? Is government unique relative to private sector? If truly public goods in light of market failures If truly public goods in light of market failures

(which?)(which?) If better at enforcement, information (?)If better at enforcement, information (?) If better at building institutional environment, If better at building institutional environment,

dynamically aided through guaranteesdynamically aided through guarantees If not unique, or facing institutional and political If not unique, or facing institutional and political

economy constraintseconomy constraints How can guarantees best be done by private How can guarantees best be done by private

sector/contract?sector/contract? Is it (just) a question of how to optimally use a given Is it (just) a question of how to optimally use a given

amount of public funds for a certain objective?amount of public funds for a certain objective?

Can one model the best Can one model the best designs?designs?

What is then the best design given What is then the best design given objectives, government and private sector objectives, government and private sector constraints?constraints? Auction of guaranteesAuction of guarantees Support for financial intermediariesSupport for financial intermediaries Subsidy to borrowerSubsidy to borrower Co-financing or co-fundingCo-financing or co-funding Insurance type productsInsurance type products Risk-sharing Risk-sharing Guarantees, partial, fullGuarantees, partial, full Etc. etc.Etc. etc.