1 Comments on Hancock, Peek, and Wilcox and Wilcox and Yasuda Sole Martínez Pería (World Bank) Presentation prepared for the World Bank, Rensselaer Polytechnic Institute and the Journal of Financial Stability Conference on “Partial Credit Guarantee Schemes – Experiences and Lessons”, Washington, D.C. March 13-14, 2008

2 What are these papers about?  Hancock, Peek and Wilcox analyze the impact of the U.S. Small Business Administration (SBA) Guarantee Program. Use state level data between to study the impact on economic activity (growth rates, employment, wages, income, bankruptcies, etc.). Assess whether the SBA guarantee acted as a stabilizer.  Wilcox and Yasuda study the effect of the Japanese Credit Guarantee System (CGS). Develop a model to think about potential effects of guarantees on lending (guaranteed and non-guaranteed). Use annual data on city and regional bank loans to SMEs and large businesses over the period  Both good papers that address important questions regarding interesting case studies.

3 What do the papers teach us about PCGs?  Hancock, Peek and Wilcox SBA-guaranteed loans appear to have had positive impact on economic activity. SBA-guaranteed loans may have stabilized the economy by offsetting reductions in bank loans due to recessions or drops in bank capital. Some evidence that impact of SBA program larger during episodes of higher interest rates.  Wilcox and Yasuda Loan guarantees seemed to have increased total lending at city (large and national) banks. Guaranteed (G) and non-guaranteed (NG) loans appear to be complements. G loans did not increase NG lending by regional banks. G and NG are substitutes.

4 Comments on Hancock, Peek, and Wilcox 1.Identification of impact of SBAs and determinants of SBAs Large potential for reverse causality from economic activity to SBAs and vice versa. Lagging variables likely not enough to address endogeneity. Estimations of impact of SBA loans on economic activity that do not control for non-guaranteed loans might overestimate the effect of SBA loans. Consider economic impact across various measures of SBA guarantees (E.g., look at impact of number of borrowers to check for consistency). Perhaps better way to assess impact of guarantees would be to compare behavior of firms that qualify and those that do not. 2.Assessing whether SBA loans act as stabilizers Instead of looking at whether SBA loans respond to economic conditions (which lead to reverse causality concerns), consider looking at whether impact of SBAs on economic conditions largest during periods of banking duress. E.g., interact SBA with bank capital and delinquencies to see whether effects are largest during periods of low bank capital and high delinquencies.

5 Comments on Wilcox and Yasuda 1.Data and the possibility for a mechanical association Papers looks at impact of guaranteed loan on total loans and SME loans but link can be tautological. Best to separate guaranteed from non-guaranteed loans. 2.Identification and concerns about endogeneity Estimations might also suffer from reverse causality and omitted variables bias. Lagged variables and estimates of maximum total national supply of guarantees are questionable instruments. At least need to include tests for validity and strength of instruments. 3.Interpretation of results Are estimates of impact of guarantees on loans different from 1? Paper seems to suggest that increase in lending resulting from loan guarantee scheme is a good thing. But, given design of guarantee (i.e., no credit risk for banks, fixed premiums and reduced capital requirements), critical to assess impact on default rates, efficiency of allocation of resources, and economic activity.

6 What is left unanswered: Suggestions for future work  Do guarantees bring additionality in terms of number of loans or, even better, borrowers?  Are guarantees helping/reaching the most opaque and financially constrained borrowers? (some of this is in Hancock et al.)  Do loan terms (maturities, interest rates) vary with guarantees?  Impact on banking stability via default rates?

7 Conclusions  Good papers that analyze interesting case studies.  Room for improvement on estimations (in particular identification) and interpretation of results.  Scope for more work to look at some unanswered questions. THANK YOU!