Outsourcing Bank Loan Screening : The Economics of Third-Party Loan Guarantees

Third-party loan guarantees are prevalent for the bank loans made in China. We study the economics of third-party loan guarantees using data from a large and legitimate loan guarantee firm. We show that guarantors provide useful information about the borrowers. We conclude that the loan guarantors provide a second level of delegation of loan screening similar to the delegated monitoring. We reject the plausible alternative that loan guarantees implement a regulatory arbitrage to circumvent interest rate caps. The successful private loan guarantors in China provide a useful contrast to the dysfunctional providers of credit default swaps (CDS) in the US