Research Feature – November 2023

Public Guarantees and Private Banks’ Incentives: Evidence from the COVID-19 Crisis.

Gabriel JiménezOpens in new window, Luc Laeven, David Martínez-Miera and Jose-Luis Peydró

Abstract. We show that private incentives shape the allocation of public guaranteed loans (PGL), resulting in weaker banks shifting riskier corporate loans to taxpayers. We exploit credit register data during the COVID-19 shock in Spain, and a stylized model guides the empirics. Unlike non-PGL, banks provide more PGL to riskier firms in which banks have higher pre-crisis shares of firm total credit. Importantly, effects are stronger for less solid banks. Results using firm(-bank) fixed effects and loan volume/price information suggest a supply-driven mechanism. Exploiting exogenous variation across similar firms with different PGL access, we corroborate our previous findings, and show that PGL increases banks’ overall lending — and credit share — to riskier firms, especially for less solid banks. We show how these results have relevant real effects at the firm level in terms of firm survival and investment. Click here File PDF: Opens in new window (141 KB).