Charging fees for government-backed loans actually makes the whole economy riskier because it scares off the stable borrowers.
SSRN · March 13, 2026 · 6285580
Why it matters
When governments charge fees to guarantee loans, healthy firms avoid the cost by opting for non-guaranteed private credit. This leaves only the riskiest borrowers in the government program, inadvertently concentrating defaults and undermining the stability the program was meant to provide.
From the abstract
We study how guarantee fees affect lending by exploiting the Belgian COVID-19 loan guarantee program, which charged lower fees to SMEs than to large firms. Using this size-based fee discontinuity in a regression discontinuity design, we show that large firms facing higher fees are more likely to obtain non-guaranteed loans that are cheaper than comparable guaranteed loans. Both banks and firms benefit from avoiding the fee: borrowers pay lower rates, and lenders retain part of the avoided fee as