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Sovereign loan guarantees and financial stability

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  • De Lorenzo Buratta, Ivan
  • Pinheiro, Tiago

Abstract

We analyze the effects of sovereign loan guarantees on financial stability in Portugal using a DSGE model. Sovereign loan guarantees decrease the default rate of banks and increase credit. 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. A decomposition of the impact of sovereign loan guarantees suggests that insuring banks against loan losses can complement and enhance conventional macroprudential policy.

Suggested Citation

  • De Lorenzo Buratta, Ivan & Pinheiro, Tiago, 2025. "Sovereign loan guarantees and financial stability," Journal of Banking & Finance, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001037
    DOI: 10.1016/j.jbankfin.2025.107483
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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