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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

Author

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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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    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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