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

Gabriel Jimenez, Luc Laeven, David Martínez-Miera and Jose-Luis Peydro
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David Martínez-Miera: UC3M and CEPR

No 2318, Working Papers from Banco de España

Abstract: This paper shows that private incentives influence the allocation of public guaranteed lending (PGL), resulting in weaker banks shifting riskier corporate loans’ risk to taxpayers. We exploit data from the Banco de España’s Central Credit Register during the COVID-19 shock in Spain, and a stylized model is used to structure the empirical results. Unlike non-PGL, banks provide more PGL to riskier firms accounting for a higher share of their total lending to firms before the crisis. Importantly, the effects are stronger for weaker banks. Results using firm (bank) fixed effects and loan volume/price information suggest a supply-driven mechanism. Exploiting exogenous variations across similar firms with different access to PGL, we show that PGL increases banks’ lending to riskier firms, both overall and as a share of their total lending, especially for weaker banks.

Keywords: banking; private incentives; COVID-19; public guarantees; risk-shifting (search for similar items in EconPapers)
JEL-codes: E62 G01 G21 G38 H81 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2023-07
New Economics Papers: this item is included in nep-ban and nep-eec
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https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 23/Files/dt2318e.pdf First version, July 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2318

DOI: 10.53479/30812

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