Public Guaranteed Loans and Bank Risk-Taking

We study the effect of Public Guaranteed Loans (PGLs) on bank risk-taking during the Covid-19 pandemic in France. The presence of guarantee schemes may encourage riskier lending, pushing banks to lend to riskier borrowers or worsening incentives to prevent write-offs of loan applicants. Investigating the risk-taking channel of PGLs at the extensive margin, we find that smaller and riskier firms had a higher probability of obtaining a PGL. Yet, isolating credit demand from credit supply at the intensive margin, we find that safer firms had higher amounts of PGLs, while banks that were more exposed to non-performing loans (NPLs) before the crisis made smaller PGLs to risky firms, thereby using the guaranteed loan program to improve their financial position and reduce exposure to NPLs. This result remains valid when looking at the total amount of outstanding credit. By examining the substitution effect of SGLs, we find that banks substituted more PGLs for unsecured loans when firms are sounder. Finally, at the bank level, we find that PGLs have no impact on the overall credit risk of banks credit portfolio.

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Public Guaranteed Loans and Bank Risk-Taking
  • Publié le 15/11/2022
  • FR
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Mis à jour le : 15/11/2022 12:06