Loan Guarantees, Bank Lending and Credit Risk Reallocation
70 Pages Posted: 18 Nov 2021 Last revised: 13 Dec 2023
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Loan Guarantees, Bank Lending and Credit Risk Reallocation
Loan Guarantees, Bank Lending and Credit Risk Reallocation
Loan Guarantees, Bank Lending and Credit Risk Reallocation
Date Written: December 12, 2023
Abstract
Do banks extending government-guaranteed loans simultaneously reduce their risk exposure to firms? Using unique euro-area credit register data and the COVID-19 guarantee programs as a laboratory, we find that banks extending guaranteed loans reduced non-guaranteed credit by over 30% relative to other banks lending to the same firm. Substitution was highest for riskier and smaller firms in more affected sectors and for stronger banks. Nevertheless, banks offered cheaper credit and longer maturities to guaranteed loan recipients, especially more fragile ones. This improvement in lending terms is the flipside of credit substitution: the two correlate positively.
Keywords: loan guarantees, bank lending, COVID-19 pandemic, substitution, credit risk
JEL Classification: G18, G21, E63, H12, H81
Suggested Citation: Suggested Citation