Burning Money? Government Lending in a Credit Crunch


We analyze new lending to firms by a state-owned bank in crisis times, the potential adverse selection faced by the bank, and the causal real effects associated to its lending. For identification, we exploit: (i) a new credit facility set up in Spain by its state-owned bank during the credit crunch of 2010-2012; (ii) the bank’s continuous scoring system, together with firms’ individual credit scores and the threshold for granting vs. rejecting loan applications; (iii) the rich credit register matched with firm- and bank-level data. We show that, compared to privately-owned banks, the state-owned bank faces a worse pool of applicants, is tighter (softer) in lending to firms with observable (unobservable) riskier characteristics, and has substantial higher loan defaults. Using a regression discontinuity approach around the threshold, we show that the supply of credit causes large positive real effects on firm survival, employment, investment, total assets, sales, and productivity, as well as crowding-in of new credit by private banks.