The Effects of Mutual Guarantee Consortia on the Quality of Bank Lending

Improving banks'’ ability to screen and monitor small firms

This paper analyzes whether Italian mutual guarantee consortia (MGCs) improve the quality of bank lending to small and medium enterprises (SMEs) in Italy.

The MGCs are a well developed financial institution in Italy. Each member of the consortium contributes to a guarantee fund, from which banks draw the collateral for loans given to MGC members. The consortium is, therefore, an institutional device that puts under the same responsibility a group of small firms that need bank lending, but individually have a limited collateral capacity. The study draws on a dataset obtained from the Italian Credit Register, to show that:

  • Probability of a small firm affiliated to an MGC of defaulting is lower than that of firms not affiliated to such a consortium;
  • MGCs improve banks' ability to screen and monitor small firms;
  • MGCs can ease SME credit conditions, thereby increasing private incentives to preserve the quality of credit.

MGCs can fill the gap between credit guarantee schemes exclusively funded by government and that of private guarantees of individual borrowers. In doing so, they could provide better quality of credit and lower interest rates to SMEs.

About this Publication

By Columba, F., Gambacorta, L. , Mistrulli, P.