Public-Guaranteed Loans, Bank Risk-Taking and Regulatory Capital Windfall

The presence of guarantee schemes may foster riskier lending, pushing banks to lend to riskier borrowers or worsening incentives to prevent write-offs of loan applicants. Yet, we find that the partial government guarantee (between 70\% and 90\% of the loan) encouraged banks to lend according to their usual risk criteria so that the safest companies have obtained higher amounts of PGL. In addition, banks that were lowly capitalized and more exposed to non-performing loans (NPLs) before the pandemic granted higher amounts of PGLs, thereby using the guaranteed loan program to improve their financial position and reduce their risk-weighted assets (RWA) through a regulatory capital windfall effect. Finally, at the aggregate bank level, we find that PGLs had no impact on the overall credit risk of banks portfolio.