Public credit guarantee and financial additionalities across SME risk classes

In this paper we study the functioning of the Italian public guarantee fund (“Fondo Centrale di Garanzia”, FCG) for Small and Medium Enterprises (SMEs). Using an instrumental variable strategy, based on the eligibility for the FCG, we investigate whether the guarantee generated additional loans and/or lower interest rates to SMEs. Differently from previous literature, by focusing on the lending activity of a single large Italian lender we control for the probability of default as assessed by the bank’s internal rating model, and we examine whether the effects of the guarantee differ across firms belonging to different classes of risk. We find that guaranteed firms receive an additional amount of credit equal to 7-8 percent of their total banking exposure. We also estimate a reduction of about 50 basis points of interest rates applied to term loans granted to guaranteed firms. The effects on credit availability are concentrated in the intermediate class of solvent firms, i.e. those neither too safe nor too risky. Conversely, interest rate effects are present in all classes, but for the least risky firms. Finally, we observe a stronger impact of the guarantee for solvent firms with a longer relationship with the bank. This finding questions their ability to reduce financial frictions for very young firms.