The demand for loan guarantees in the UK 1981–2018: time series analysis

Abstract

ABSTRACT Loan guarantee schemes are the primary public policy for addressing credit rationing of smaller firms across the world. In this paper we use four decades of data from the UK scheme to examine how sensitive demand for guaranteed loans is to the two main scheme parameters, the interest rate premium and guarantee coverage rate, as well as the state of the macroeconomy. Using an error correction model, we find that demand is particularly sensitive to the interest rate premium and to a lesser extent the guarantee coverage. In economic crisis periods, demand naturally increases which explains their use in Covid-19.