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RWP 21-03, June 2021; updated April 2022

Credit contractions are costly, but policymakers have limited tools to counter them. In this paper, we examine the efficacy of public credit guarantees as antidotes to a credit crunch by studying the Paycheck Protection Program (PPP). We find that the program averted a historic credit crunch at a time when banks were unlikely to meet firm credit needs by risking their own capital. Our evaluation incorporates selection effects emanating from banks' participation decision on both the extensive and intensive margins. Risk-aversion, rather than profitability, motivated bank participation in the program. Indeed, even as the program boosted loan growth among participants, it attenuated profitability.

JEL Classifications: C11, G21, G28, H12

Article Citation

  • Marsh, W. Blake, and Padma Sharma. 2021. “Loan Guarantees in a Crisis: An Antidote to a Credit Crunch.” Federal Reserve Bank of Kansas City, Research Working Paper no. 21-03, June. Available at External Link


W. Blake Marsh

Senior Economist

Blake Marsh is a senior economist at the Federal Reserve Bank of Kansas City. He joined the Banking Research department in July 2016. His research areas are commercial bank regul…

Padma Sharma


Padma Sharma is an Economist at the Federal Reserve Bank of Kansas City. She joined the Economic Research Department in July 2019. Prior to joining the department, she completed …