We study the effect of governments’ fiscal support on banks’ loan loss provisioning during the COVID-19 pandemic. In addition, we decompose fiscal support into direct support and liquidity support to examine the effect of different types of support measures on banks’ loan loss provisioning. Direct support generally refers to cash transfers, tax reliefs, and tax deferrals, while liquidity support generally refers to government-backed loans and equity injections. We find that direct support reduced banks’ loan portfolio risk whereas liquidity support did not. Moreover, we find the effect goes beyond a macroeconomic stabilization effect, suggesting that direct support directly contributed to mitigating banks’ loan portfolio risk during the pandemic. Our results are robust to controlling for other policy interventions, alternative model specifications, and an instrumental variable approach. We further discuss the policy implications of our analysis.

Theory offers conflicting predictions on how bank specialization affects corporate innovation. We show that the sign and magnitude of this effect vary with the degree of “asset overhang” across sectors—the risk that new technologies reduce the value of banks’ legacy loan portfolios. Using Belgian innovation survey data and US patent data, we find that lenders’ sectoral specialization enhances innovation for firms operating in sectors with low asset overhang, but hinders innovation in sectors with high asset overhang. These findings are robust to different measures of asset overhang and an identification strategy using bank mergers. We further show that these heterogeneous effects arise through financial contracting. Our findings highlight how product market characteristics shape the role of bank specialization in innovation.