Sovereign loan guarantees and financial stability

Ivan De Lorenzo Buratta and Tiago Pinheiro

Journal of Banking & Finance, 2025, vol. 178, issue C

Abstract: We analyze the effects of sovereign loan guarantees on financial stability in Portugal using a DSGE model. Sovereign loan guarantees decrease the default rate of banks and increase credit. On the other hand, guarantees increase the leverage and default rate of firms. These effects are larger the lower the sensitivity of the capital of banks to capital requirements. Behind these results are the reduction in regulatory risk-weights and the transfer of loan losses from banks to the sovereign brought by sovereign loan guarantees. A decomposition of the impact of sovereign loan guarantees suggests that insuring banks against loan losses can complement and enhance conventional macroprudential policy.

Keywords: COVID-19 pandemic; Sovereign loan guarantees; Financial stability; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E3 E44 G01 G21 O52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001037

DOI: 10.1016/j.jbankfin.2025.107483

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