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Loan Guarantees and Bank Incentives: Evidence from Covid-19 Relief Funds in Peru

Author

Listed:
  • Burga, Carlos

    (PUC Chile)

  • Cuba, Walter

    (Banco Central de Reserva del Perú)

  • Díaz, Eduardo

    (Banco Central de Reserva del Perú)

  • Sánchez, Elmer

    (Banco Central de Reserva del Perú)

Abstract

We estimate the effects of loan guarantees on delinquency rates during economic downturns and explore how the allocation of such guarantees shapes its aggregate effect. We do so by studying a large program of loan guarantees implemented by the Central Reserve Bank of Peru and the Peruvian government, aimed at providing liquidity to the financial system in order to prevent disruptions in the supply chain. We find that the program expanded credit supply and reduced delinquency rates. A 10 percent increase in credit is associated with a 1.4 percentage points decline in the probability of experiencing repayment delays for the average firm. This elasticity is significantly bigger among small firms operating in highly exposed industries. However, these firms obtain less credit when participating in the program, due to their reduced operating scale and borrowing capacity (relative to bigger firms) and financial institutions’ own credit assessment. Our results suggest that targeting more sensitive firms matter for the aggregate impact of the program. Thus, by implementing auctions for different segments of the credit market, which increased competition among financial institutions, the Central Bank improved the effectiveness of the program in terms of delinquency rates and financial stability.

Suggested Citation

  • Burga, Carlos & Cuba, Walter & Díaz, Eduardo & Sánchez, Elmer, 2023. "Loan Guarantees and Bank Incentives: Evidence from Covid-19 Relief Funds in Peru," Working Papers 2023-001, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2023-001
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    File URL: https://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2023/documento-de-trabajo-001-2023.pdf
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    Citations

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    Cited by:

    1. Camilo Gómez & Daniela Rodríguez-Novoa, 2024. "Firm Support Measures, Credit Payment Behavior, and Credit Risk," Borradores de Economia 1277, Banco de la Republica de Colombia.

    More about this item

    Keywords

    Guarantees; credit risk; COVID-19.;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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