The Distribution of Crisis Credit: Effects on Firm Indebtedness and Aggregate Risk

We study the distribution of credit during crisis times and its impact on firm indebtedness and macroeconomic risk. Whereas policies can help firms in need of financing, they can lead to adverse selection from riskier firms and higher default risk. We analyze a large-scale program of public credit guarantees in Chile during the COVID-19 pandemic using unique transaction-level data of demand and supply of credit, matched with administrative tax data, for the universe of banks and firms. Credit demand channels loans toward riskier firms, distributing 4.6% of GDP and increasing firm leverage. Despite increased lending to riskier firms at the micro level, macroeconomic risks remain small. Several factors mitigate aggregate risk: the small weight of riskier firms, the exclusion of the riskiest firms, bank screening, contained expected defaults, and the government absorption of tail risk. We quantitatively confirm our empirical findings with a model of heterogeneous firms and endogenous default.