Bank–firm relations and the role of Mutual Guarantee Institutions at the peak of the crisis

We examine the role played by Mutual Guarantee Institutions (MGIs) in the lending policies undertaken by banks at the peak of the Great Crisis of 2007–2009. We address this issue by using a large database on Italian firms built from the credit files of UniCredit banking Group and focusing on small business. We provide an empirical analysis of the determinants of the probability that a borrowing firm will suffer financial tension and obtain two main innovative findings. First, we find that small firms supported by MGIs less likely experienced financial tensions even at that time of utmost financial stress. Second, our empirical evidence shows that MGIs played a signaling role beyond the simple provision of collateral. This latter finding suggests that the information provided by MGIs turned out to be key for bank–firm relations as scoring and rating systems – being typically based on pro-cyclical indicators – had become less informative during the crisis.

► Analysis of MGIs during the Q1-2009, the peak of the 2007–2009 financial crisis.
► Small firms supported by MGIs less likely experience financial tensions.
► MGIs have a signaling role beyond the simple provision of collateral.
► Information provided by MGIs key for bank–firm relations as rating systems become less informative during the crisis.