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The Effect of Credit Insurance on Liquidity Constraints and Default Rates: Evidence From a Governmental Intervention

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  • Kevin Cowan
  • Alejandro Drexler
  • Álvaro Yañez

Abstract

Understanding the extent to which interventions in financial markets can reduce liquidity constraints is of crucial importance to researchers and policymakers. Even though there is consensus that limited access to financing can reduce the number of profitable projects undertaken by entrepreneurs, there is little research on how well governmental interventions address this problem. In this paper we use Partial Credit Guarantee Schemes in Chile to study how such a government intervention in the financial system can affect the access that entrepreneurs have to the formal financial system. We also explore how these schemes affect the default rates on the guaranteed loans. We find that partial credit guarantee schemes increase the number of loans and the aggregate amount lent to small and medium size businesses. In addition, we find that credit guarantees increase the debt capacity of individual entrepreneurs, holding assets fixed. We also find that Credit Guarantees increase default rates, but the evidence suggests that this result is explained mainly by misalignment of bank incentives rather than moral hazard in the context of client practices.

Suggested Citation

  • Kevin Cowan & Alejandro Drexler & Álvaro Yañez, 2009. "The Effect of Credit Insurance on Liquidity Constraints and Default Rates: Evidence From a Governmental Intervention," Working Papers Central Bank of Chile 524, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:524
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    References listed on IDEAS

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    Cited by:

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    2. Cristián Pinto, 2015. "The Effect of Labor Market Flexibility on Microfinance Institutions Performance: International Evidence," Serie Working Papers 21, Universidad del Desarrollo, School of Business and Economics.
    3. World Bank, 2011. "Turkey - Improving Conditions for SME Growth Finance and Innovation," World Bank Publications - Reports 12211, The World Bank Group.

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