Empty Creditors: How Public Credit Guarantees Impair Loan Restructuring

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Speaker: Professor Cem Demiroğlu, Koç University

About the seminar

Public credit guarantees (PCGs) successfully expand access to financing but create a significant unintended consequence. They transform banks into ‘empty creditors’ with reduced incentives to restructure troubled loans. Analysing comprehensive loan-level data from Turkey’s 2017 credit guarantee programme, we document that guaranteed loans are 24.45 percentage points more likely to default than undergo restructuring.

Our within-firm analysis, which remains robust even for higher-quality borrowers who predominantly receive PCGs, reveals guaranteed loans have a 9.35 percentage point higher default probability. This pattern stems from moral hazard. The effect strengthens with higher guarantee coverage and weakens as banks approach portfolio loss caps.

A 2018 policy reform mandating restructuring attempts before claiming guarantees reduced this relationship between PCGs and defaults by approximately 45-65%. Our findings highlight how PCGs can generate inefficient liquidations and substantial economic costs by severing the connection between banks’ control rights and their exposure to default outcomes.

Speaker bio

Cem Demiroğlu is a Professor of Finance at Koç University and a member of the Turkish President’s Council of Economic Advisors. He serves on the Board of Borsa İstanbul and previously was founding president of Türk Reasürans A.Ş. He is also a founding member of Enstitü Sosyal, an independent policy think tank focused on education, social and economic reform.

His research lies at the intersection of corporate finance and financial intermediation, with a focus on information asymmetries, incentive conflicts, and the design of financial contracts. His recent work focuses on the impact of government interventions in credit markets. His articles have been published in leading academic journals such as the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Management Science.

He holds a Ph.D. in Finance from the University of Florida and has held visiting positions at the London Business School, University of Florida, and Bocconi University.

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