We study whether government subsidies can stimulate bank funding of marginal investment projects and the associated … can use it as an exogenous shock to identify bank responses. On average, firm subsidies do not affect bank lending, but … reduce banks’ distance to default. Average effects conflate important bank-level heterogeneity though. Conditional on various …

We develop a model of bank risk-taking with strategic sovereign default risk. Domestic banks invest in real projects … their default risks through purchases of bonds. But, for high debt levels, this influence is lost since bank and government …