Public guarantees and credit additionality during the Covid-19 pandemic

We study the public loan guarantee programs implemented in Italy in the aftermath of the Covid-19 pandemic. Guided by a theoretical model and relying on a unique loan-level dataset covering the period between December 2019 and March 2021, including both guaranteed and non-guaranteed loans, we quantify to what extent public guarantees created additional credit across programs with different coverage ratios and over time. Credit additionality was highest, at around 84 cents per euro of guarantees, for the fully guaranteed loans originated in the first quarter of the program (Q2-2020). In the following quarters, the additionality of the different programs decreased, hovering around 50-60 cents per euro of guarantees. We also document that bank capitalization affected additionality for loans with lower coverage, in which banks have more skin in the game. In contrast, the additionality of the public guarantees varied very little across firms with different levels of risk, liquidity, and size