DP13267 Burning Money? Government Lending in a Credit Crunch

Author(s): Gabriel Jiménez, José Luis Peydró, Rafael Repullo, Jesús Saurina
Publication Date: October 2018
Keyword(s): Adverse Selection, credit crunch, credit scoring, crowding-in, Real effects of public credit, state-owned banks
JEL(s): E44, G01, G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13267

We analyze a small, new credit facility of a Spanish state-owned-bank during the crisis, using its continuous credit scoring system, firm-level scores, and credit register data. Compared to privately-owned banks, the state-owned bank faces worse applicants, softens (tightens) its credit supply to unobserved (observable) riskier firms, and has much higher defaults. In a regression discontinuity design, the supply of public credit causes: large positive real effects to financially-constrained firms (whose relationship banks reduced substantially credit supply); crowding-in of new private-bank credit; and positive spillovers to other firms. Private returns of the credit facility are negative, while social returns are positive.