Credit risk management for banking institutes in Europe: the use of credit guarantees in financing SMEs

Abstract

The aim of this study is to present the use of Credit Guarantees Schemes (CGS) as a risk sharing instrument concerning the finance of EU-28 SMEs. Small and medium-sized enterprises (SMEs) are the backbone of the European economy since they represent 99% of all businesses in the EU, employ 2/3 of the total working force and produce 57% of the total value added. In order to finance their activities, SMEs rely on bank lending their main source of external finance. Moreover, they are confronted with a deteriorated lending and risk-taking capacity of banks due to tighter regulatory requirements and the banks’ accumulation of nonperforming loans. On this basis, it is recommended that CGSs are an effective instrument in financing SMEs’ needs. Both borrowers and lenders benefit when using CGSs, since the risk is shared efficiently between the actors.