Government guarantees of loans to small businesses: Effects on banks’ risk-taking and non-guaranteed lending |
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| Institution: | 1. Haas School of Business, University of California, Berkeley, Berkeley, CA 94720, United States;2. Graduate School of Business Administration, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8601, Japan;1. Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, USA;2. Leeds School of Business, University of Colorado at Boulder, 995 Regent Drive, Boulder, CO 80302, USA;1. University of Amsterdam, Netherlands;2. CEPR, United Kingdom;3. Olin Business School, Washington University in St. Louis, United States;4. ECGI, Belgium;1. London School of Economics, Houghton Street, London WC2A 2AE, UK;2. Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK;1. Monfort College of Business, University of Northern Colorado, Campus Box 128, Greeley Colorado 80639, USA;2. Graduate School of Commerce and Management, Hitotsubashi University, 2-1 Naka Kunitachi Tokyo 186-8601, Japan;3. Graduate School of Business Administration, Hitotsubashi University, 2-1 Naka Kunitachi Tokyo 186-8601, Japan;1. Bank of England, Threadneedle Street, London EC2R 8AH, UK;2. CfM, United Kingdom;3. WorldRemit, United Kingdom |
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| Abstract: | We analyzed the loan guarantees that the Japanese government provided for banks’ loans to small and medium-sized enterprises (SMEs). We modeled and estimated how much and under what conditions loan guarantees affected banks’ risk-taking and banks’ non-guaranteed lending.In the presence of controls for bank capital and other factors that might affect supplies of bank credit, our estimates supported our model's implications that loan guarantees increased banks’ risk-taking.Consistent with our model, our estimates imply that, when banks initially had fewer guaranteed loans and then got more guaranteed loans, guaranteed loans were complements to, rather than substitutes for, non-guaranteed loans. As complements, loan guarantees could be “high-powered” in that they generated increases not only in guaranteed loans, but also increases in non-guaranteed loans that were a multiple of the increases in guaranteed loans. In addition, banks’ having more capital was associated with doing more non-guaranteed lending. |
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