Public loan guarantees and bank lending in the COVID-19 period

Firms’ demand for bank loans has been at a record-high level since March 2020 as firms have scrambled to bridge liquidity gaps originating from the COVID-19 shock. To help banks accommodate the surge in loan demand at favourable conditions, most euro area governments have implemented schemes of public guarantees on bank loans. These transfer some of the arising credit risk and eventual credit losses from banks to governments, thereby mitigating the costs for banks. The features of the loan guarantee schemes’ vary across countries as well as their actual use, with higher take-ups being reported in Spain and France, while lower amounts have been taken up in Italy and Germany. Moreover, SMEs in the sectors most affected by the crisis (e.g. trade, tourism, transport) seem to have benefited the most from these programmes. Overall, public loan guarantee schemes have played a key role in supporting corporate lending dynamics since April and preserving favourable lending conditions. The phasing out of these schemes needs to be carefully aligned with corporate financing needs in the months ahead, while their potential side-effects warrant monitoring. JEL Classification: E44, E51, E62, G21, H81