Loan Guarantees and Credit Supply

Abstract

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 SBA loans 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. Excess mass increases in periods with guarantee generosity, and placebo results indicate that the effect disappears when the guarantee notch is eliminated.