Causal Effect of Credit Guarantees for Small‐ and Medium‐Sized Enterprises: Evidence from Italy

• Published date: 01 January 2020
• DOI: http://doi.org/10.1111/sjoe.12332
• Date: 01 January 2020

Scand. J. of Economics 122(1), 191–218, 2020

DOI: 10.1111/sjoe.12332

Causal Effect of Credit Guarantees for

Small- and Medium-Sized Enterprises:

Evidence from Italy*

Alessio D’Ignazio

Bank of Italy,00184 Rome, Italy

alessio.dignazio@bancaditalia.it

Carlo Menon

OECD, FR-75775 Paris Cedex 16, France

carlo.menon@oecd.org

Abstract

Weevaluate the effectiveness of a partial credit guarantee program, implemented in a largeItalian

region, that aimed to improvethe access to credit of small and medium enter prises. Using unique

microdata from a broad set of firms, we show that the policy increased the long-term loans for

beneficiary firms, while the total volume of bank loans was unaffected. Furthermore, targeted

firms benefited from a substantial decrease in interest rates. However,there is some evidence that

firms are more likely to default as a consequence of the treatment. Conversely, the results do not

point to any significant effect on investments.

Keywords: Access to credit; banking; SME financing

JEL classification:G21; L25; O12

I. Introduction

Credit guarantee schemes (CGSs) aim to facilitate firms’ access to credit by

reducing the risk incurred by lenders. By covering a share of the default

risk, such schemes provide guarantees on loans: in the case of default

by the borrower, the lender recovers the value of the guarantee. Such

schemes, which can be either publicly or privately funded, are widespread

in both developed and developing economies, as they are considered to

be an effective instrument for improving credit-constrained firms’ access

*Wewish to thank the following for their valuable comments and suggestions: Mario D. Amore,

Raffaello Bronzini, Guido de Blasio, Chiara Criscuolo, Lucia Cusmano, Paolo Finaldi Russo,

Steve Gibbons, Giorgio Gobbi, Inga Heiland,Silvia G. Mag ri, Sabrina Pastorelli,Paolo Pinotti,

Massimo Sbracia, Ugo Trivellato,Gregory Udell, three anonymous referees, and participants at

the OECD/DSTI internal seminars. Wealso wish to thank Alice Chambers for excellent editorial

assistance.The usual disclaimer applies. The views expressed in the paper are those of the authors

and do not necessarily reflect those of the Bank of Italy or the OECD.

C

The editors of The Scandinavian Journal of Economics 2018.

192 Effect of credit guarantees for Italian SMEs

to financial assets, counterbalancing the firms’ lack of collateral. Their

implementation is frequently listed among the policy recommendations of

international organizations (European Commission, 2011; OECD, 2011).

The reasons for the popularity of guarantee schemes are the multiplicative

effects embedded in such policies, their capacity to move private capital,

and the possibility of recovering a large share of the public fund at the end

of the program.

Despite their popularity, economic theory is not conclusive on the net

effect of CGSs on firms’ finances and activities. The actual effects of

these programs are ultimately an empirical question, but there is very

little evidence available so far. In this paper, we try to reduce this gap

by estimating the causal effect of a CGS implemented in Italy in 2008.

Compared with the existing body of empirical literature, this paper has

the advantage of relying on an estimation method that requires weaker

assumptions, and therefore provides more ground for the consistency of the

estimated treatment effects. However, the emphasis on solid identification

comes at the cost of focusing on a single wave of a regional program,

the only one for which a plausible instrumental variable (IV) strategy is

achievable.

The identification of the policy net effects is indeed challenging, as

treated and untreated firms can be intrinsically different, and this difference

might be unobservable to us. Ideally, the program effectiveness is measured

by the difference in average outcome of the same group of firms with

and without treatment at the same time, respectively. Such a counterfactual

scenario is obviously unfeasible, but we obtain a consistent estimate of

treatment effects via an IV estimation. The exogenous source of treatment

is derived from the unforeseen acquisition of the local small bank that was

supposed to administer the policy by one of the largest Italian banking

groups. This latter group also “inherited” the direct access to the incentive.

Moreover, as a consequence of the stickiness of the bank–firm relationship

in Italy, this event meant that firms that historically received loans from

the acquiring bank group were more likely to enroll in the CGS program.

Thus, we argue that receiving loans from the acquiring bank before the

policy was planned is an exogenous factor increasing treatment probability.

The validity of the IV procedure is further reinforced by the inclusion of a

wide set of fixed effects and additional controls, and it survives a demanding

falsification test.

We find that the program had no impact on the volume of bank loans

to firms, while increasing the amount of long-term loans and decreasing

the interest rate paid by firms. The probability of default increased slightly.

All other firm-level variables were unaffected; in particular, we were not

able to find significant effects on firm investments, suggesting that the

improved financial structure did not have a direct “real” effect, at least

C

The editors of The Scandinavian Journal of Economics 2018.