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The Covid-19 Pandemic, Sovereign Loan Guarantees, and Financial Stability

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  • Tiago Pinheiro

Abstract

We analyze the effects of the Portuguese COVID-19 sovereign loan guarantee scheme on financial stability using a DSGE model. Sovereign loan guarantees decrease the default rate of banks, increase credit, and speed up economic recovery. On the other hand, guarantees increase the leverage and default rate of firms. These effects are larger the lower the sensitivity of the capital of banks to capital requirements. Behind these results are the reduction in regulatory risk-weights and the transfer of loan losses from banks to the sovereign brought by sovereign loan guarantees.

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  • Tiago Pinheiro, 2023. "The Covid-19 Pandemic, Sovereign Loan Guarantees, and Financial Stability," Working Papers w202313, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202313
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp202313_1.pdf
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    References listed on IDEAS

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