FSI published a brief report analyzing the loan guarantee programs launched to support for bank lending to companies, including small and medium-size enterprises (SMEs), in response to the COVID-19 pandemic. The brief reviews key features of a sample of guarantee programs, illustrating approaches taken in response to a systemic crisis and highlighting the differences between these approaches. It also reviews the complementary measures and the key challenges that can affect the overall success of the guarantee programs.
To provide liquidity to the economy, governments in several jurisdictions are offering guarantees on bank loans to non-financial companies. The design of such programs needs to strike a difficult balance between responding promptly to the pandemic and maintaining a sufficient level of prudence. Key features of a sample of programs (for example, target beneficiaries, coverage of the guarantee, loan terms, and length of the program) reflect this tension. The brief contains a table that takes stock of the key features of a sample of bank guarantee programs. Concerning eligibility, all programs in the sample require that companies be in good financial standing and have no non-performing loans as of a cut-off date just prior to the onset of the pandemic. The target beneficiaries vary in the sample, but in every country there is a program for SMEs and, in some countries, also for larger companies. Programs addressed to SMEs face lighter operational requirements and benefit from higher coverage ratios of the guarantee.
Under the assumption that the COVID-19 pandemic can affect firms’ liquidity but not their viability, limits to both the lifespan of these programs and the duration of loans are to be expected. Finally, the intensity and speed of the crisis required a high level of flexibility in the design of the guarantee program, with some features becoming less stringent over time. Some jurisdictions, such as Hong Kong, Italy, Switzerland, and the United States, also increased the size of the program.
One of the conclusions is that loan guarantee programs can benefit from complementary measures that increase their appeal to banks and their customers. While in normal circumstances these measures may not be needed, pressure to implement the COVID-19 related guarantee programs rapidly and on a large scale has driven authorities to introduce such complementary measures. Incentives were created for the banks to join these programs by exploiting flexibility in existing prudential requirements, while central banks have often provided liquidity support.
Such programs are, however, subject to operational challenges and fiscal capacity limits that can affect the overall success of the guarantee programs. Countries in better fiscal condition at the onset of the crisis can offer larger guarantee programs as a proportion of their economy, thus facilitating the recovery once the emergency is over. Moreover, as some of the guaranteed loans will inevitably fail to perform, public funds will have to be disbursed. Any doubt about a country’s fiscal capacity to absorb losses on guaranteed loans could damage the profitability or even the viability of banks, possibly engulfing them in a negative bank-sovereign loop
Keywords: International, Banking, COVID-19, SME, Operational Risk, Guarantee Scheme, Credit Risk, Expected Credit Loss, Regulatory Capital, FSI, BIS
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