What the study found
The study argues that subsidized public lending schemes can create incentive risks in two-tier lending relationships involving a public development bank, participating commercial banks, and firm borrowers. Based on the KfW COVID-19 emergency lending case, the authors propose public lending contracts intended to steer banks and firms toward better-aligned choices.
Why the authors say this matters
The authors say their proposals are meant to improve public lending design in an economic crisis. They conclude that their contract ideas can help reduce incentive problems in subsidized lending and improve incentive alignment between banks and borrowers.
What the researchers tested
The paper combines casual empirical observations, institutional analysis, and normative theoretical modeling. It draws on evidence from Germany’s national development bank KfW during the COVID-19 crisis and examines the emergency lending scheme as a case study.
What worked and what didn't
The authors identify obstacles to efficient contracting in the lending relationship and use that case to support their proposed contract designs. They propose contracts that would discourage banks from seeking public support for financially strong firms and for non-viable zombie firms, while giving firms a menu of contracts that reveals their rating and matches public funds to crisis-related need. They also argue that banks should retain part of borrower default risk to improve incentive alignment.
What to keep in mind
The abstract does not provide quantitative results or detailed evidence beyond the case study description. It also does not describe limitations in detail, so the scope is limited to the available summary and the KfW COVID-19 experience.
Key points
- The paper focuses on incentive risks in subsidized public lending during an economic crisis.
- It uses Germany’s KfW COVID-19 emergency lending scheme as a case study.
- The authors propose contract designs to discourage support for financially strong firms and non-viable zombie firms.
- The proposed firm contracts are meant to reveal firm ratings and match public funds to crisis-related need.
- The authors argue that banks should retain part of borrower default risk to improve incentive alignment.
Disclosure
- Research title:
- KfW lending scheme revealed incentive risks in crisis lending
- Authors:
- Guenter Franke, Jan Pieter Krahnen
- Institutions:
- University of Konstanz, Goethe University Frankfurt, Leibniz Institute for Financial Research SAFE
- Publication date:
- 2026-03-05
- OpenAlex record:
- View
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