Public Guarantees, Relationship Lending and Bank Credit: Evidence from the COVID-19 Crisis

77 Pages Posted: 15 Mar 2022

See all articles by Gabriel Jiménez

Gabriel Jiménez

Banco de España

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

David Martinez Miera

Charles III University of Madrid; Center for Economic Policy Research

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

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Date Written: March 14, 2022

Abstract

This paper analyzes the impact of public credit guarantee schemes on the allocation and performance of bank credit during the COVID-19 crisis. We exploit exhaustive loan-level data from the credit register with unique information on the provision of COVID-19 public loan guarantees in Spain. We find that firms are more likely to obtain a public guaranteed loan from banks to which they have larger pre-COVID credit exposures, measured as the share of the firm’s total credit outstanding with the bank before the shock. This effect is more pronounced for risky firms and for firms in more pandemic-affected sectors, especially for weaker ex-ante banks, with lower capital and higher nonperforming loans. Effects operate both at the intensive and extensive margin of lending. Moreover, we show that the guarantee scheme results in credit substitution at the firm-bank level, with the share and amount of nonguaranteed (private) credit declining for firms that obtain guaranteed loans, in part reflecting early prepayment of outstanding private credit. Further, banks that grant guaranteed loans are less prone to recognize loan impairment, consistent with the public guarantee acting as a protection against (private) credit risk. Finally, we find that banks that participate more in the public credit guarantee scheme gain market share by increasing their portfolio of loans to existing but also to (less risky) new borrowers. These results show that government guaranteed credit has relevant economic effects on the structure of the banking system by affecting both existing and new borrower-lender relationships.

Keywords: Public guarantees, bank lending, COVID-19, bank lending relationships, public and public risk substitution, bank competition

JEL Classification: G01, G21, G38, E44, E62, H12, H81

Suggested Citation

Jimenez, Gabriel and Laeven, Luc A. and Martinez Miera, David and Peydro, Jose-Luis, Public Guarantees, Relationship Lending and Bank Credit: Evidence from the COVID-19 Crisis (March 14, 2022). Available at SSRN: https://ssrn.com/abstract=4057530 or http://dx.doi.org/10.2139/ssrn.4057530

Gabriel Jimenez

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Martinez Miera (Contact Author)

Charles III University of Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Center for Economic Policy Research ( email )

London
United Kingdom

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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