• Evaluation of the Lending Interest Rates for Package Credit Guarantee Schemes

Abstract

The Small and Medium Enterprise Credit Guarantee Fund of Taiwan (SMEG) offers Package Credit Guarantee Schemes, which are different from the individualization of authorized or specific credit guaranty. Package guarantee and limits on total repayment sums. This model requires assessment of the correlation between individual entities regarding the risks of the package. Hence, this paper constructs a copula model to help banks determine the loan rate under the characteristics of the dependence structure of the package.

According to our model, we get some conclusions as follow: 1. The loan rate is a decreasing function of the guaranteed repayment rate and the recovery rate, and an increasing function of the default probability. 2. The sensitivities of the loan rate to the guaranteed repayment rate, the recovery rate, and the default probability depend on the correlation between individual entities. The loan rate will be more sensitive to the guaranteed repayment rate, the recovery rate, and the default probability if the correlation coefficient is high, and vice versa. 3. Our conclusion still holds even if we change the factor distribution from normal distribution to leptokurtic distribution.

Keywords: package credit guarantee, copula model, lending interest rates