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:Policy File 2021
Main Authors: W Blake Marsh, Sharma, Padma
Format: Report
Language:English
Subjects:
Banking
Credit control
Finance
Loans
Payroll costs
Online Access:Request full text
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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.