This paper analyzes the impact of public credit guarantee schemes on the allocation and performance of bank credit during the COVID-19 crisis. We exploit exhaustive loan-level data from the credit register with unique information on the provision of COVID-19 public loan guarantees in Spain. We find that firms are more likely to obtain a public guaranteed loan from banks to which they have larger pre-COVID credit exposures, measured as the share of the firm"s total credit outstanding with the bank before the shock. This effect is more pronounced for risky firms and for firms in more pandemic-affected sectors, especially for weaker ex-ante banks, with lower capital and higher nonperforming loans. Effects operate both at the intensive and extensive margin of lending. Moreover, we show that the guarantee scheme results in credit substitution at the firmbank level, with the share and amount of nonguaranteed (private) credit declining for firms that obtain guaranteed loans, in part reflecting early prepayment of outstanding private credit. Further, banks that grant guaranteed loans are less prone to recognize loan impairment, consistent with the public guarantee acting as a protection against (private) credit risk. Finally, we find that banks that participate more in the public credit guarantee scheme gain market share by increasing their portfolio of loans to existing but also to (less risky) new borrowers. These results show that government guaranteed credit has relevant economic effects on the structure of the banking system by affecting both existing and new borrower-lender relationships.
public guarantees; bank lending; covid-19; bank lending relationships; public and private risk substitution; bank competition