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The use of personal guarantees in Irish SME lending

Author

Listed:
  • Carroll, James

    (Central Bank of Ireland)

  • McCann, Fergal

    (Central Bank of Ireland)

  • O'Toole, Conor

    (Central Bank of Ireland)

Abstract

This Letter describes the use of personal guarantees (PGs) in Irish SME bank lending. To date, domestic or international evidence on this topic has been extremely sparse. Using data from the Red C / Department of Finance SME Credit Demand Survey, we show that one third of successful finance applications in Ireland from September 2012 to 2014 have a PG attached, with the most recent data suggesting that this rate was decreasing in 2014. Consistent with banks using PGs as a deterrent to default for borrowers perceived to be riskier, we find that PG usage is higher for new loans to smaller firms (in terms of both employment and turnover), younger firms, innovative firms, non-exporting firms and firms that made a loss in the previous six months. PGs are more prevalent among higher-value loans, suggesting PGs may also be used to reduce potential Loss Given Default. We also find that firms in the construction and wholesale/retail sector are most likely to have a PG attached to new lending. Finally, we find strong evidence that PGs are used in tandem with other forms of tangible business collateral such as land, buildings, machinery and other assets.

Suggested Citation

  • Carroll, James & McCann, Fergal & O'Toole, Conor, 2015. "The use of personal guarantees in Irish SME lending," Economic Letters 06/EL/15, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:06/el/15
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    References listed on IDEAS

    as
    1. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
    2. Lawless, Martina & McCann, Fergal & O'Toole, Conor, 2013. "The importance of banks in SME financing: Ireland in a European context," Economic Letters 05/EL/13, Central Bank of Ireland.
    3. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
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    Cited by:

    1. Saleem Bahaj & Angus Foulis & Gabor Pinter, 2020. "Home Values and Firm Behavior," American Economic Review, American Economic Association, vol. 110(7), pages 2225-2270, July.
    2. Lawless, Martina & O Toole, Conor & Slaymaker, Rachel, 2018. "Estimating an SME investment gap and the contribution of financing frictions," Papers WP589, Economic and Social Research Institute (ESRI).

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