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Loan Guarantees, Bank Lending and Credit Risk Reallocation

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Abstract

How do government loan guarantees reallocate bank lending and credit risk? Using unique euro-area credit register data and exploiting the COVID-19 loan guarantee programs as a laboratory, we establish two main findings. First, guaranteed loans were mostly extended to small but creditworthy firms in sectors severely affected by the pandemic, borrowing from larger and stronger banks. Second, guaranteed loans partially substituted for pre-existing debt. Banks extending guaranteed loans reduced non-guaranteed credit by about 40% more than other banks lending to the same firm. Substitution was highest for riskier and smaller firms in more affected sectors, and for stronger banks.

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  • Carlo Altavilla & Andrew Ellul & Marco Pagano & Andrea Polo & Thomas Vlassopoulos, 2021. "Loan Guarantees, Bank Lending and Credit Risk Reallocation," CSEF Working Papers 629, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 30 Jul 2022.
  • Handle: RePEc:sef:csefwp:629
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    Cited by:

    1. Giuseppe Cascarino & Raffaele Gallo & Francesco Palazzo & Enrico Sette, 2022. "Public guarantees and credit additionality during the Covid-19 pandemic," Temi di discussione (Economic working papers) 1369, Bank of Italy, Economic Research and International Relations Area.
    2. Kazakov, Aleksandr & Koetter, Michael & Titze, Mirko & Tonzer, Lena, 2022. "Firm subsidies, financial intermediation, and bank risk," IWH Discussion Papers 2/2022, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    loan guarantees; bank lending; COVID-19 pandemic; substitution; credit risk.;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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