Loan Guarantees and Credit Supply

Posted: 21 May 2019 Last revised: 29 Feb 2020

See all articles by Natalie Bachas

Natalie Bachas

Princeton University - Department of Economics

Olivia Kim

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Constantine Yannelis

University of Chicago Booth School of Business

Date Written: April 22, 2019

Abstract

The efficiency of federal lending guarantees depends on whether guarantees increase lending supply, or simply act as a subsidy to lenders. We use notches in the guarantee rate schedule for loans backed by the Small Business Administration to estimate the elasticity of bank lending volume to loan guarantees. We document significant bunching in the loan distribution on the side of the size threshold that carries a more generous loan guarantee. The excess mass implies that increasing guarantee generosity by 1 percentage point of loan principal would increase per-loan lending volume by $19,000. Bank lending is responsive both in the crosssection and in the time-series - excess mass increases with the guarantee discontinuity, and placebo results indicate that the effect disappears when the guarantee notch is eliminated.

JEL Classification: G21, G28, H81

Suggested Citation

Bachas, Natalie and Kim, Olivia and Yannelis, Constantine, Loan Guarantees and Credit Supply (April 22, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3367958 or http://dx.doi.org/10.2139/ssrn.3367958

Natalie Bachas (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Olivia Kim

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Constantine Yannelis

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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