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Public Guarantees and Private Banks’ Incentives: Evidence from the COVID-19 Crisis

Author

Listed:
  • Gabriel Jiménez

    (Banco de España)

  • Luc Laeven

    (European Central Bank and CEPR)

  • David Martínez-Miera

    (UC3M and CEPR)

  • José-Luis Peydró

    (Imperial College London, ICREA-UPF-CREIBSE and CEPR)

Abstract

This paper shows that private incentives influence the allocation of public guaranteed lending (PGL), resulting in weaker banks shifting riskier corporate loans’ risk to taxpayers. We exploit data from the Banco de España’s Central Credit Register during the COVID-19 shock in Spain, and a stylized model is used to structure the empirical results. Unlike non-PGL, banks provide more PGL to riskier firms accounting for a higher share of their total lending to firms before the crisis. Importantly, the effects are stronger for weaker banks. Results using firm (bank) fixed effects and loan volume/price information suggest a supply-driven mechanism. Exploiting exogenous variations across similar firms with different access to PGL, we show that PGL increases banks’ lending to riskier firms, both overall and as a share of their total lending, especially for weaker banks.

Suggested Citation

  • Gabriel Jiménez & Luc Laeven & David Martínez-Miera & José-Luis Peydró, 2023. "Public Guarantees and Private Banks’ Incentives: Evidence from the COVID-19 Crisis," Working Papers 2318, Banco de España.
    • Handle: RePEc:bde:wpaper:2318
    DOI: https://doi.org/10.53479/30812
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    References listed on IDEAS

    as
    1. Rüdiger Fahlenbrach & Kevin Rageth & René M Stulz, 2021. "How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis [The risk of being a fallen angel and the corporate dash for cash in the midst of COVID]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5474-5521.
    2. Sandeep Dahiya & Anthony Saunders & Anand Srinivasan, 2003. "Financial Distress and Bank Lending Relationships," Journal of Finance, American Finance Association, vol. 58(1), pages 375-399, February.
    3. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    4. Viral V Acharya & Sascha Steffen, 2020. "The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 430-471.
    5. Granja, João & Makridis, Christos & Yannelis, Constantine & Zwick, Eric, 2022. "Did the paycheck protection program hit the target?," Journal of Financial Economics, Elsevier, vol. 145(3), pages 725-761.
    6. Gale, William G, 1991. "Economic Effects of Federal Credit Programs," American Economic Review, American Economic Association, vol. 81(1), pages 133-152, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banking; private incentives; COVID-19; public guarantees; risk-shifting;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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