Banks vs. Firms: Who Benefits from Credit Guarantees?

Alberto Martin, Sergio Mayordomo and Victoria Vanasco
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Sergio Mayordomo: BANCO DE ESPAÑA
Victoria Vanasco: CREI, UPF AND BSE

No 2523, Working Papers from Banco de España

Abstract: Governments often support private credit with guarantee schemes, compensating lenders for borrower defaults. Such schemes typically rely on banks allocating guarantees among borrowers, but how banks do so is not well understood. We study this in an economy where entrepreneurial effort, crucial for efficiency, is not contractible, creating a debt overhang problem. Credit guarantees can boost efficiency only if they lower repayment obligations, but their allocation by banks is subject to two distorsions. First, insofar as guarantees are scarce, banks extract rents from all allocated guarantees. Second, banks tilt the allocation of guarantees towards their less productive and highly-indebted borrowers, from whom they can extract even larger rents. Our findings align with evidence from guarantees granted in Spain after the COVID-19 pandemic.

Keywords: credit guarantees; debt overhang; liquidations (search for similar items in EconPapers)
JEL-codes: G10 G18 G21 G28 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2025-05
New Economics Papers: this item is included in nep-cfn
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https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 25/Files/dt2523e.pdf First version, May 2025 (application/pdf)

Related works:
Working Paper: Banks vs. Firms: Who Benefits from Credit Guarantees? (2023)
Working Paper: Banks vs. firms: who benefits from credit guarantees? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2523

DOI: 10.53479/39805

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