Loan Guarantees in a Crisis: An Antidote to a Credit Crunch

110 Pages Posted: 29 Jul 2021 Last revised: 27 Apr 2022

See all articles by W. Blake Marsh

W. Blake Marsh

Federal Reserve Bank of Kansas City

Padma Sharma

Federal Reserve Bank of Kansas City

Date Written: April 11, 2022

Abstract

Credit contractions are costly, but policymakers have limited tools to counter them. In this paper, we examine the efficacy of public credit guarantees as antidotes to a credit crunch by studying the Paycheck Protection Program (PPP). We find that the program averted a historic credit crunch at a time when banks were unlikely to meet firm credit needs by risking their own capital. Our evaluation incorporates selection effects emanating from banks' participation decision on both the extensive and intensive margins. Risk-aversion, rather than profitability, motivated bank participation in the program. Indeed, even as the program boosted loan growth among participants, it attenuated profitability.

Keywords: Paycheck Protection Program, government loan guarantees, credit crunch, bank liquidity, net interest margins, Bayesian modeling

JEL Classification: C11, G21, G28, H12

Suggested Citation

Marsh, W. Blake and Sharma, Padma, Loan Guarantees in a Crisis: An Antidote to a Credit Crunch (April 11, 2022). Federal Reserve Bank of Kansas City Working Paper No. 21-03, Available at SSRN: https://ssrn.com/abstract=3890319 or http://dx.doi.org/10.2139/ssrn.3890319

W. Blake Marsh (Contact Author)

Federal Reserve Bank of Kansas City

1 Memorial Dr.
Kansas City, MO 64198
United States

Padma Sharma

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198

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