The Covid-19 Pandemic, Sovereign Loan Guarantees, and Financial Stability

Tiago Pinheiro

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We analyze the effects of the Portuguese COVID-19 sovereign loan guarantee scheme on financial stability using a DSGE model. Sovereign loan guarantees decrease the default rate of banks, increase credit, and speed up economic recovery. 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.

JEL-codes: E3 E44 G01 G21 O52 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-eec and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202313

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