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Valuing and Accounting for Loan Guarantees

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  • Mody, Ashoka
  • Patro, Dilip K

Abstract

To achieve certain policy objectives, governments frequently provide private borrowers with loan guarantees that cover some or all of the risk that the borrower will be unable to repay the loan. Such guarantees are extremely valuable, and their value increases with the riskiness of the underlying asset or credit, the size of the investment, and the duration of the loan. The flip side of a guarantee's value to a lender is its cost to the government. Such a cost is not explicit but is real nevertheless. When providing guarantees, governments therefore must establish accounting, valuation, and risk-sharing mechanisms. This article describes methods of valuing guarantees; reports estimates of the value of guarantees in different settings; and summarizes new methods of accounting designed to anticipate losses, create reserves, and channel funds through transparent accounts to ensure that the costs of guarantees are evident to government decisionmakers. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Mody, Ashoka & Patro, Dilip K, 1996. "Valuing and Accounting for Loan Guarantees," World Bank Research Observer, World Bank Group, vol. 11(1), pages 119-142, February.
  • Handle: RePEc:oup:wbrobs:v:11:y:1996:i:1:p:119-42
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    Cited by:

    1. Polackova, Hana, 1998. "Contingent government liabilities : a hidden risk for fiscal stability," Policy Research Working Paper Series 1989, The World Bank.
    2. Honohan, Patrick, 2010. "Partial credit guarantees: Principles and practice," Journal of Financial Stability, Elsevier, vol. 6(1), pages 1-9, April.
    3. repec:eee:chieco:v:44:y:2017:i:c:p:98-111 is not listed on IDEAS
    4. Fabio Pizzutilo & Francesco Calò, 2015. "Loan Guarantees: An Option Pricing Theory Perspective," International Journal of Economics and Financial Issues, Econjournals, vol. 5(4), pages 905-909.

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