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This research investigates how government credit support during the COVID-19 pandemic impacted lending behaviors of banks, particularly towards riskier firms.

June 3, 2026Open Access

Government Credit Support and Post‐Policy Spillovers in Bank Lending: Evidence from Korea During COVID ‐19*

Key Points

This research investigates how government credit support during the COVID-19 pandemic impacted lending behaviors of banks, particularly towards riskier firms.
Examined lending data from Korean banks during and after COVID-19 credit support programs (2020-2022).
Analyzed effects on eligible small and medium enterprises (SMEs) and non-eligible firms using firm fixed effects and interactions of firm characteristics.
Conducted pre-policy trend tests to validate findings.
Banks increased lending to riskier eligible SMEs during the credit support period and continued to lend more to riskier non-eligible firms post-policy.
The post-policy lending increase was prominent in banks with limited regulatory capital and high exposure to eligible lending.
Strong evidence observed through metrics like Z-score and leverage ratios, indicating significant lending behavior changes.

Abstract

Abstract This paper examines whether Korea's COVID‐19 credit support programs generated spillover effects on bank lending to riskier firms. While banks extended relatively more credit to riskier eligible SMEs during the policy period (2020), lending to riskier non‐eligible firms also increased in the post‐policy period (2021–2022), indicating a spillover beyond directly targeted firms. This post‐policy increase is concentrated among banks with limited regulatory capital headroom and high exposure to policy‐eligible lending. The evidence is strongest for Z‐score and Leverage and is supported by pre‐policy trend tests, firm fixed effects, and additional post‐policy interactions of firm characteristics.

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