Discussion of:

“PCGs–The Global Picture”

Tito Cordella(LAC Chief Economist Office, World Bank)

Workshop on“Partial Credit Guarantee Schemes – Experiences and Lessons

Washington DC, March 13, 2008

What is the purpose of PCGs?

1. To improve access to credit to firms that are constrained (e.g., SMEs) because of:

Lack of collateral Asymmetric information High screening costs

2. And/or create positive externalities

To other sectors (through innovation) Across time (infant industry argument) To politicians

The appeal of PCGs

Allow to exploit informational advantages of the guarantor vis-à-vis the lender

Or their better contract enforcing ability/seniority In the case of IFI

Allow diversification of riskTransforming a portfolio of sub-prime loans in a AAA one

Exploit regulatory arbitrage

Provide subsidies in a market friendly way (at least in appearance) and/or conceal the true fiscal cost

Design issues Who should carry out the credit appraisal?

The agent with the informational advantage

How large should the coverage be? It depends on who has the informational advantageLarger if the guarantorSmaller if the lender (to preserve incentives)

How should the guarantee be priced?Depends on the externalities and of informational asymmetries

Extent of adverse selection/screening costsExtent of moral hazard/monitoring costs (risk based pricing)

New Evidence B-K-M provide new evidence through survey of

PCGs around the world

The results of the questionnaire allow for informative descriptive statistics on some key PCGs design issues

But not on their effectiveness

Don’t get me wrong, this is a first important step!

That allows preliminary “tests” on the incentive compatibility of existing PCGs schemes

New Evidence

1. A surge of new PGC schemes in the last years

2. Publicly operated schemes are on average significantly younger than mutually operated schemes

Does this mean the PCGs are becoming increasing popular, and that publicly operated schemes are becoming the guarantee system of choice in new PCGs?

Or does this reflect a survival bias in the sample and the fact that publicly operated schemes are more likely to go bankrupt?

New Evidence

3. Governments have an important role in funding, the private sector in management risk assessment and recovery

4. Government funding is positively correlated with government management but not with government recovery or risk assessment

However, the results are not very clear as Manage_G and CrRisk_G are positively correlated with both Recovery_G and Recovery_P

Is this incentive compatible? Probably not as the

median coverage of the guarantee is 80%!

New Evidence

5. Risk pricing is limited (bad) but there is a positive correlation between coverage ratios and pricing according to past performance (good)

6. PCGs that take on more ex-post risk have a better risk management (good)

7. Government involvement in risk assessment and recovery (but not in funding and management) is positively correlated with higher default

Puzzling result giving the high coverage ratio But it might highlight different government

objectives (connected lending)

Summing up…

I learnt a lot from these two interesting papers

The evidence on the “incentive compatibility” of existing PCGs is mixed but not very reassuring

Additional research is needed to understand under which circumstances PGCs can improve welfare

Design issues are crucial and might require some modeling effort

We need some testable implication to guide the empirical analysis

And a lot of effort to gather additional data to test our models!