The Distribution of Crisis Credit: Effects on Firm Indebtedness and Aggregate Risk
We study the distribution of credit during crisis times and its impact on firm indebtedness and macroeconomic risk. Whereas policies can help firms in need of financing, they can lead to adverse selection from riskier firms and higher default risk. We analyze a large-scale program of public credit guarantees in Chile during the COVID-19 pandemic using unique transaction-level data on credit applications, approvals, and loans for the universe of banks and firms, matched with administrative tax data. The program distributes credit amounting to 4.6% of GDP and increases firm leverage. Although demand channels credit toward riskier firms at the micro level, macroeconomic risks remain small. Several factors mitigate aggregate risk: the small weight of riskier firms, the exclusion of the riskiest firms, bank screening, contained expected defaults, and the government absorption of tail risk. We quantitatively confirm our empirical findings with a model of heterogeneous firms and endogenous default.
We thank participants at presentations held at the ASSA Annual Meetings, Chile's Central Bank, Financial Market Commission, and Ministry of Finance, the Federal Reserve Bank of Atlanta, the IMF Jacques Polak Annual Research Conference, the Inter-American Development Bank, the International Centre for Economic Analysis, the LACEA-LAMES Annual Meetings, the Middle East and North Africa Central Bank Conference, the MoFiR Workshop at Bank of Portugal, the SED Annual Meetings, and the World Bank for helpful comments. We also thank feedback from Rodrigo Alfaro, Mehdi Bartal, Solange Berstein, Felipe C ordova, Natalie Cox, Giovanni Dell'Arricia, Andrés Fernández, Aart Kraay, Patricio Toro, Camilo Vio, and Jasmine Xiao. We are grateful to Brian Castro, Esteban Espinoza, Joaquín Fernández, Regina Mannino, Pablo Muñoz, and especially Carolina Wiegand for outstanding research assistance. We thank Antonn Park for able editorial support. The World Bank Chile Research and Development Center, the Knowledge for Change Program (KCP), and the Research Support Budget (RSB) provided financial support for this paper. The findings, interpretations, and conclusions are those of the authors and do not necessarily represent those of the Central Bank of Chile, the Financial Market Commission of Chile, or the World Bank, its executive directors, the governments they represent, or the National Bureau of Economic Research.
Joseph P. Kaboski
Over the past three years, Kaboski has received substantial financial support from Yale Research Initiative on Innovation and Scale’s (Y-RISE), CEPR’s Structural Transformation and Economic Growth (STEG) Research Programme, the IMF, and the Becker-Friedman Institute. In addition, Kaboski has a paid position as Chair of the Academic Steering Committee of Structural Transformation and Economic Growth (STEG) Research Programme and unpaid positions on the boards of the Bureau for Research and Economic Analysis of Development (BREAD) and the Catholic Research Economists Discussion Organization (CREDO) and the Academic Advisory Council of the Institute for New Structural Economics (INSE) at Peking University.