Abstract: This paper exploits target and blanket emergency credit relief programs during the COVID-19 pandemic to study policy externalities. We ask whether policies destined for supporting credit flow in the targeted economy can spill over to affect the untargeted economy via the bank-lending channel. To answer this question, we explore the variation in banks’ pre-pandemic loan portfolios that are eligible for government guarantee schemes and apply instrumental variables to address the endogeneity concern. Using Portuguese credit register data, we find that banks decrease loan supply to firms with government guarantees using their own lending capacities to preserve lending to viable firms outside the program. In particular, these loans are characterized by higher interest rates and less collateral.