Marco Pagano - University of Naples Federico II 

"Loan Guarantess. Bank Lending and Credit Risk Reallocation" with Carlo Altavilla (European Central Bank), Andrew Ellul (Indiana University), Andrea Polo (LUISS University) and Thomas Vlassopoulos (European Central Bank)


This paper investigates whether publicly supported credit guarantee schemes, used extensively after the onset of the Covid-19 pandemic, led to a (partial) transfer of bank risk to the taxpayer, whereby banks receiving these guarantees engaged in credit substitution when lending without a concomitant increase in credit supply. We use a novel bank-firm data from the Euro-wide area, AnaCredit, and focus on the four largest Euro-area countries. First, we find that smaller, more credit worthy firms and those operating in the most severely hit sectors were more likely to receive guaranteed lending coming mostly from larger, more liquid, and highly capitalized banks. Second, we investigate whether the guaranteed loans constituted additional new lending or resulted in credit substitution, where new guaranteed debt replaced preexisting non-guaranteed debt. We find that indeed credit substitution did occur and was highest in firms that are smaller, riskier and operating in the more affected sectors especially when they got credit from larger and stronger banks. Similar behavior, though with different magnitudes, is observed across the four largest Euro area countries. Overall, we unearth novel evidence showing that government guarantees resulted in credit flowing to the firms with the largest need to support while making banks’ balance sheets stronger in the process.

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