Friday seminar - "Banks vs. Firms: Who Bene ts from Credit Guarantees?" - Victoria Vanasco (Barcelona School of Economics)
Banks vs. Firms: Who Beneﬁts from Credit Guarantees?
Abstract: Many countries implemented large-scale programs to guarantee private credit in re-sponse to the outbreak of COVID-19. Yet the role of banks in allocating guarantees – and thus in shaping their eﬀects – is not well understood. We study this role in an economy where entrepreneurial eﬀort is crucial for eﬃciency but it is not contractible, giving rise to a debt overhang problem. In such an environment, credit guarantees increase eﬃciency to the extent that they allow ﬁrms to reduce their repayment obligations. We show that banks follow a pecking order when allocating guarantees, prioritizing riskier, highly in-debted, ﬁrms, from whom they can extract more surplus. The competitive equilibrium is constrained ineﬃcient: all else equal, the planner would tilt the allocation of guarantees towards more productive, safer ﬁrms, and would fully pass-through the beneﬁts of guar-antees to ﬁrms in the form of lower repayments. We conﬁrm the model’s main predictions on the universe of all credit guarantees granted in Spain following the outbreak of COVID.
Keywords: Credit guarantees, debt overhang, liquidations.