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Debt restructuring with multiple bank relationships

Author

Listed:
  • Angelo Baglioni

    (Università Cattolica del Sacro Cuore)

  • Luca Colombo

    (Università Cattolica del Sacro Cuore)

  • Paola Rossi

    (Bank of Italy)

Abstract

When the debt of distressed firms is dispersed, free riding makes it difficult to reach a restructuring agreement. We develop a multistage game in which banks come across each other frequently, allowing them to threaten punishment in case of free riding. As the number of banks grows, the chance of re-encountering a bank and of being punished for free riding increases, improving the likelihood of cooperation. Looking at Italian firms in distress, we find that the restructuring probability increases with the number of banks up to a threshold - around three banks - beyond which coordination problems prevail.

Suggested Citation

  • Angelo Baglioni & Luca Colombo & Paola Rossi, 2018. "Debt restructuring with multiple bank relationships," Temi di discussione (Economic working papers) 1191, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1191_18
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    More about this item

    Keywords

    banks; debt restructuring; number of creditors;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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