Government-owned banks and crisis credit allocation: Evidence from fiscal liquidity placement in Indonesia

This paper examines how fiscal liquidity placement through government-owned banks (GOBs) is associated with credit allocation during systemic crises, using Indonesia's COVID-19 policy response as an empirical setting. Unlike monetary facilities such as TLTROs or funding-for-lending schemes, Indonesia channelled budgetary resources directly into selected GOBs, creating a fiscal credit-support mechanism operating through bank ownership. Using quarterly bank-level data for 93 banks from 2017–2021 and a difference-in-differences framework, we analyse ownership-based differences in lending responses to local pandemic exposure. Banks more exposed to COVID-19 experienced sharper contractions in credit, particularly in working-capital lending. Relative to private and foreign banks, GOBs reallocated credit toward working-capital lending, while non-GOBs reduced short-term corporate credit more sharply. Fiscal liquidity placement is associated with portfolio reallocation toward productive lending rather than broad credit expansion, alongside reductions in securities holdings. These responses are not accompanied by higher credit risk but coincide with lower credit income for GOBs, consistent with a quasi-fiscal intermediation role. Overall, the results highlight how state ownership shapes crisis-era credit allocation in emerging markets.