Loan guarantees, bank underwriting policies and financial fragility

Elena Carletti, Agnese Leonello and Robert Marquez

No 2782, Working Paper Series from European Central Bank

Abstract: Loan guarantees represent a form of government intervention to support bank lending. However, their use raises concerns as to their effect on bank risk-taking incentives. In a model of •nancial fragility that incorporates bank capital and a bank incentive problem, we show that loan guarantees reduce depositor runs and improve bank underwriting standards, except for the most poorly capitalized banks. We highlight a novel feedback effect between banks•' underwriting choices and depositors' •run decisions, and show that the effect of loan guarantees on banks' incentives is different from that of other types of guarantees, such as deposit insurance. JEL Classification: G21, G28

Keywords: bank monitoring; charter value; fundamental runs; panic runs (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-rmg
Note: 2292323
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232782

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