Loan guarantees in a crisis: An antidote to a credit crunch?

Credit contractions are costly, but policymakers have limited tools to counter them. In this paper, we examine the efficacy of public credit guarantees as antidotes to a credit crunch by studying the Paycheck Protection Program (PPP). We find that the program averted a historic credit crunch at a ti...

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Bibliographic Details
Published in:Journal of financial stability 2024-06, Vol.72, p.101244, Article 101244
Main Authors: Marsh, W. Blake, Sharma, Padma
Format: Article
Language:English
Subjects:
Bank liquidity
Bayesian modeling
Credit crunch
Government loan guarantees
Net interest margins
Paycheck protection program
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Summary:Credit contractions are costly, but policymakers have limited tools to counter them. In this paper, we examine the efficacy of public credit guarantees as antidotes to a credit crunch by studying the Paycheck Protection Program (PPP). We find that the program averted a historic credit crunch at a time when banks were unlikely to meet firm credit needs by risking their own capital. Our evaluation incorporates selection effects emanating from banks’ participation decision on both the extensive and intensive margins. Risk-aversion, rather than profitability, motivated bank participation in the program. Indeed, even as the program boosted loan growth among participants, it attenuated profitability.
ISSN:1572-3089
1878-0962
DOI:10.1016/j.jfs.2024.101244