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Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy

In: Uses of central balance sheet data offices' information

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  • Fabio Schiantarelli
  • Massimiliano Stacchini
  • Philip E. Strahan

Abstract

Exposure to liquidity risk makes banks vulnerable to runs from both depositors and from wholesale, short-term investors. This paper shows empirically that banks are also vulnerable to run-like behavior from borrowers who delay their loan repayments (default). Firms in Italy defaulted more against banks with high levels of past losses. We control for borrower fundamentals with firm-quarter fixed effects; thus, identification comes from a firm's choice to default against one bank versus another, depending upon their health. This `selective' default increases where legal enforcement is weak. Poor enforcement thus can create a systematic loan risk by encouraging borrowers to default en masse once the continuation value of their bank relationships comes into doubt.
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Suggested Citation

  • Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2017. "Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy," IFC Bulletins chapters, in: Bank for International Settlements (ed.),Uses of central balance sheet data offices' information, volume 45, Bank for International Settlements.
    • Handle: RePEc:bis:bisifc:45-08
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    Citations

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    Cited by:

    1. Raffaele Santioni & Fabio Schiantarelli & Philip E. Strahan, 2017. "Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy," NBER Working Papers 23541, National Bureau of Economic Research, Inc.
    2. Fabiano Schivardi & Enrico Sette & Guido Tabellini, 2017. "Credit misallocation during the European financial crisis," Temi di discussione (Economic working papers) 1139, Bank of Italy, Economic Research and International Relations Area.
    3. Roman Horvath, 2018. "Financial market fragmentation and monetary transmission in the euro area: what do we know?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 21(4), pages 319-334, October.
    4. Ricardo Serrano-Padial & Lukasz Drozd, 2015. "Financial Contracting with Enforcement Externalities," 2015 Meeting Papers 1362, Society for Economic Dynamics.
    5. Lončarski, Igor & Marinč, Matej, 2020. "The political economy of relationship banking," Research in International Business and Finance, Elsevier, vol. 51(C).
    6. Bermpei, Theodora & Kalyvas, Antonios & Nguyen, Thanh Cong, 2018. "Does institutional quality condition the effect of bank regulations and supervision on bank stability? Evidence from emerging and developing economies," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 255-275.
    7. Suarez, Javier & Sánchez Serrano, Antonio, 2018. "Approaching non-performing loans from a macroprudential angle," Report of the Advisory Scientific Committee 7, European Systemic Risk Board.
    8. Brunella Bruno & Immacolata Marino, 2018. "How Do Banks Respond to Non-Performing Loans?," CSEF Working Papers 513, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 02 May 2020.
    9. Vincenzo D'Apice & Franco Fiordelisi & Giovanni W. Puopolo, 2020. "Judicial Efficiency and Lending Quality," CSEF Working Papers 588, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    10. Sutherland, Andrew, 2018. "Does credit reporting lead to a decline in relationship lending? Evidence from information sharing technology," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 123-141.
    11. Alessi, Lucia & Bruno, Brunella & Carletti, Elena & Neugebauer, Katja, 2019. "What drives bank coverage ratios: Evidence from the euro area," Working Papers 2019-14, Joint Research Centre, European Commission (Ispra site).
    12. Morales-Acevedo, Paola, 2016. "Firms’ Strategic Choice of Loan Delinquencies," Working Paper Series 321, Sveriges Riksbank (Central Bank of Sweden).
    13. Brunella Bruno & Immacolata Marino, 2017. "Bad loans and resource allocation in crisis years: Evidence from European banks," BAFFI CAREFIN Working Papers 1752, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    14. Drozd, Lukasz A. & Serrano-Padial, Ricardo, 2018. "Financial contracting with enforcement externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 153-189.

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    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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