Loan Guarantees, Bank Lending and Credit Risk Reallocation: empirical banking

Abstract

This paper investigates whether government credit guarantee schemes, used extensively after the onset of the Covid-19 pandemic to support bank lending by shifting default risk to governments, led to substitution of non-guaranteed with guaranteed credit, without leading to an increased supply of lending as intended by the policymakers. In principle, such substitution may be driven by banks exploiting public guarantees as an opportunity to reduce their credit risk exposure, or by viable and liquid firms exploiting them as a chance to restructure their debt at lower rates – or a combination of the two. We investigate this issue using a novel harmonized credit register dataset for the entire euro area, AnaCredit, matched with supervisory bank balance-sheet data, and focus on the four largest euro area countries. We establish two main findings. First, guaranteed loans were mostly extended to small but comparatively creditworthy firms operating in sectors severely affected by the pandemic, and borrowing from large, liquid and well-capitalized banks. This selection of guarantee recipients should have reduced bank-driven substitution, by discriminating against the riskiest firms, as well as firm-driven substitution, by discriminating against firms in resilient sectors. Our second finding concerns the existence and extent of substitution as well as its variation across firms and lenders. At firm level, guaranteed loans resulted in some substitution of pre-existing non-guaranteed debt with guaranteed loans, with €1 of additional loan guarantees being associated, on average, with a €0.13 reduction in pre-existing lending. The value of this elasticity varies across countries, being lowest in France and highest in Spain. For firms borrowing from multiple banks, the substitution arises from the lending behavior of the bank extending guaranteed loans, whose drop in lending is about 10 times as large as for other banks lending to the same firm. Credit substitution was highest in the case of funding granted to riskier and smaller firms operating in the more affected sectors, and borrowing from larger and stronger banks. Banking relationships attenuated credit substitution. Similar estimates, though varying in magnitude, are obtained for all countries analyzed. Overall, the evidence indicates that in the euro area government guarantees contributed to the continued extension of credit to relatively creditworthy firms hit by the pandemic, but also benefited the balance sheet of banks to some extent.