Loan guarantees, bank lending and credit risk reallocation

Carlo Altavilla, Andrew Ellul, Marco Pagano, Andrea Polo and Thomas Vlassopoulos

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: Do banks extending government-guaranteed loans simultaneously reduce their risk exposure to firms? Using unique euro-area credit register data and the COVID-19 guarantee programs as a laboratory, we find that 1 euro of guaranteed lending was associated with a reduction of 28 cents in non-guaranteed credit, relative to other banks lending to the same firm. Substitution was highest for riskier and smaller firms in more affected sectors and for stronger banks. Nevertheless, banks offered cheaper credit and longer maturities to guaranteed loan recipients, especially more fragile ones. This improvement in lending terms is the flipside of credit substitution.

Keywords: Loan guarantees; Bank lending; Credit substitution; Credit risk; COVID-19 pandemic (search for similar items in EconPapers)
JEL-codes: E63 G18 G21 H12 H81 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x2500145x

DOI: 10.1016/j.jfineco.2025.104137

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