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The Role of Loan Guarantees in Alleviating Credit Rationing. Marc Cowling. Outline. Capital market imperfections exist & limit availability of capital to smaller firms? Loan guarantee schemes Tests of credit rationing My data and estimation My results Summary Conclusions. - PowerPoint PPT Presentation
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the institute for employment studies
The Role of Loan Guarantees in Alleviating Credit RationingMarc Cowling
Outline
Capital market imperfections exist & limit availability of capital to smaller firms?
Loan guarantee schemesTests of credit rationingMy data and estimationMy resultsSummaryConclusions
Small firms and credit markets
Small firms create jobs, innovate, introduce competition etc
Do the rich make better entrepreneurs?
Loan requests often turned down, so why doesn’t price simply adjust upwards?
Adverse selection
Moral hazard
Asymmetric information (sorting by collateral)
Loan guarantee schemes
Government response to ‘perceived’ credit rationing of smaller firms with ‘viable lending propositions’
Government provides a guarantee on behalf of firm against a bank loan
In return gets a ‘premium’ (interest margin)
Contract parameters typically specify maximum loan amount, duration, age of eligible firms, size limit, sectors etc
Credit rationing exists when…
Bank margins are stickyCommitment lending increases
when treasury rates riseMore loans are collateralised
when treasury rates riseRiskier loans do not attract higher marginsNew firms do not attract higher marginsFixed rate borrowing decreases
when treasury rates rise
Tests of credit rationing
Are loan rates sticky? Further ‘stickiness’ tests examine
loan contract variables and a measure of macroeconomic circumstance
Key variables of (contractual) interest include commitment loans, collateralised loans and floating rate loans
PROPORTIONS tests: probability that a loan is (a) under commitment (b) collateralised and (c) floating rate
My data
Complete records of all loans issued under UK SFLGS between 1993 and 1998
27,331 loans
35 banks (80% through big-4 banks)
Average margin 3.25% (spread 0.25 – 9.75)
43% loans under commitment, 63% floating rate, 30% collateralised, 43% new firms, and 20% ended in default
Estimation
Stickiness tests – bank margin is regressed against real and nominal interest rates, loan contract terms, macroeconomic variables and bank dummies, firm characteristics and ex post default.
Proportions tests – three binary dependent variables (commitment loan, collateralised loan, and fixed rate loan). RHS variables same but interaction terms omitted.
My results
Stickiness testsmargins are sticky (real and nominal)commitment loans equally stickyno negative marginsfixed rate loans stickierdefaulting loans less stickysecured loans stickier
Proportions testscommitment loans decrease with treasury
ratessecured loans decrease with treasury
ratesfixed rate loans decrease with treasury
rates
Margins and real interest rates
2.8
3
3.2
3.4
3.6
3.8
4
93 94 95 96 97 Year
margin rbase
Real Rates
Margins and nominal interest rates
3
4
5
6
7
93 94 95 96 97 Year
margin base
Nominal Rates
Summary
Empirically examined prevalence of information-based, equilibrium credit rationing amongst small businesses in the UK.
In support of credit rationing we have sticky margins, lack of non-negative margins, and our collateral results.
Against credit rationing we have equality of stickiness between commitment and non-commitment loans,and the fact that new loan defaulters are offered higher margins to reflect their riskier status.
Conclusion
On balance, credit rationing is not an explanation consistent with the loan market for most small businesses in the UK.
However, there is a pool of small firms (and potential entrepreneurs) who, due to information problems, will always find it difficult to raise loans when macroeconomic conditions are worsening, even when collateral is available.
… thank you
www.employment-studies.co.uk