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How does a small firm end up with a more expensive loan guarantee when a cheaper and safer one was on offer? The intriguing case of two UK Covid-19 guarantee schemes

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  • Cowling, Marc
  • Wilson, Nick
  • Liu, Weixi

Abstract

Most countries introduced loan guarantee schemes in the Covid-19 pandemic, and the UK offered two schemes. The BBL scheme had a cap of £50,000, a 100 % guarantee, and a fixed interest rate of 2.5 %. The CBILS scheme had a cap of £5 m, an 80 % guarantee and lenders set interest rates. We exploit a behavioural anomaly that led to 9,989 firms taking a CBILS loan for a cash amount below the BBL loan cap. Larger and older firms were more likely to be in this loan class and this is caused by lender sorting of firms by risk.

Suggested Citation

  • Cowling, Marc & Wilson, Nick & Liu, Weixi, 2024. "How does a small firm end up with a more expensive loan guarantee when a cheaper and safer one was on offer? The intriguing case of two UK Covid-19 guarantee schemes," Finance Research Letters, Elsevier, vol. 67(PB).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324008572
    DOI: 10.1016/j.frl.2024.105827
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    References listed on IDEAS

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    1. Cowling, Marc, 2010. "The role of loan guarantee schemes in alleviating credit rationing in the UK," Journal of Financial Stability, Elsevier, vol. 6(1), pages 36-44, April.
    2. Hyeog Ug Kwon & Futoshi Narita & Machiko Narita, 2015. "Resource Reallocation and Zombie Lending in Japan in the 1990s," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 709-732, October.
    3. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1047-1077, October.
    4. Giorgio Gobbi & Francesco Palazzo & Anatoli Segura1, 2020. "Unintended effects of loan guarantees during the Covid-19 crisis," Vox eBook Chapters, in: AgneÌ€s BeÌ nassy-QueÌ reÌ & Beatrice Weder di Mauro (ed.), Europe in the Time of Covid-19, edition 1, volume 1, chapter 1, pages 104-108, Centre for Economic Policy Research.
    5. Julian Oliver Dörr & Georg Licht & Simona Murmann, 2022. "Small firms and the COVID-19 insolvency gap," Small Business Economics, Springer, vol. 58(2), pages 887-917, February.
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    More about this item

    Keywords

    Loan guarantees; Covid-19; Small firms; Loan contracts; Loan default;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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