Loan Guarantees and Credit Supply
Posted: 21 May 2019 Last revised: 29 Feb 2020
Date Written: April 22, 2019
The efficiency of federal lending guarantees depends on whether guarantees increase lending supply, or simply act as a subsidy to lenders. We use notches in the guarantee rate schedule for loans backed by the Small Business Administration to estimate the elasticity of bank lending volume to loan guarantees. We document significant bunching in the loan distribution on the side of the size threshold that carries a more generous loan guarantee. The excess mass implies that increasing guarantee generosity by 1 percentage point of loan principal would increase per-loan lending volume by $19,000. Bank lending is responsive both in the crosssection and in the time-series - excess mass increases with the guarantee discontinuity, and placebo results indicate that the effect disappears when the guarantee notch is eliminated.
JEL Classification: G21, G28, H81
Suggested Citation: Suggested Citation