The Credit Guarantee Bill

later12

Richard Bruton has published the Credit Guarantee Bill

http://www.rte.ie/news/2012/0411/minister-bruton-publishes-credit-guarantee-bill.html

The scheme will provide a 75% state guarantee to banks against losses on qualifying loans to firms with growth and job creation potential.
Initially, the scheme will facilitate up to €150m of additional lending a year to SMEs.
[...]
For every €150m of additional lending, the scheme is expected to benefit over 1,800 businesses. The cost of the scheme per €150m of lending is €6.38m.
However, this does not take into account benefits to the exchequer this lending will bring in terms of increased tax receipts and decreased social welfare payments.
When these benefits are taken into account, the net gain to the Exchequer is over €25m per €150m of lending.

I think the 75% guarantee figure is a wise choice taking into account current economic and commercial environment, in that it absolves the lendee of the need to provide collateral whilst at the same time preventing reckless referrals to the guarantee agency by lenders.

The 75% guarantee also mitigates against the moral hazard concern surrounding the scheme, but does not altogether overcome this question.

Furthermore, there are two excellent reasons as to why banks are reluctant to lend to SMEs: (i)they are traditionally good at hiding information and (ii) it is cumbersome to investigate their activities and chase losses. Now this scheme releases the lending institutions of 75% of the risk on these two fronts, but who is covering the governments' risk and how?

To that end, I'd be be interesting to discover what risk strategy the guarantee agency shall pursue: is it going to commission an independent review of applications, or merely base its decisions with reference to lending institutions' opinions?

It is also unclear whether loans will be available for working capital or for fixed assets, or both?

With the above qualifications, I think this sort of scheme could be a very welcome step forward in boosting the SME sector and making small dents in the unemployment statistics.

Any other opinions on the scheme?

Going Forward

Does the guarantee only apply to the Irish state-backed banks?

Scofflaw

Going Forward wrote: »

Does the guarantee only apply to the Irish state-backed banks?

Judging by the Bill, no. Anyone with a banking licence, by the looks of it.

Policy Impact Statement is here: http://www.djei.ie/enterprise/smes/RIA_Credit_Guarantee_Scheme.pdf

cordially,
Scofflaw