Public Guarantees for Small Businesses in Italy during COVID-19

Abstract

This paper investigates whether the private sector can efficiently allocate public funds during a crisis. Using loan-level data, we exploit the unique features of the Italian public guarantee scheme during COVID-19 to study lenders’ incentives to distribute government guaranteed credit. Our results indicate that two key bank characteristics facilitated loan disbursement: size and information technology. These factors are important because of the high volume of online applications and low interest margins on guaranteed lending. Pre-existing relationships matter for the allocation of guaranteed credit, as banks lend more in their core markets and where they have a larger share of branches.

Keywords: public guarantees, COVID-19, liquidity constraints, information technology, bank heterogeneity, interest rates

JEL Classification: G32, G38, H25, H32, E62