Public Credit Guarantees 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 FCG eligibility, we investigate whether the guarantee generated additional loans and/or lower interest rates for SMEs. Unlike 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 in 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 that are neither too safe nor too risky. Conversely, interest rate effects are present in all classes, except for the least risky firms. Finally, we observe a stronger impact of the guarantee for solvent firms with a longer relationship with the bank, questioning the ability of very young firms to reduce financial frictions