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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

Author

Listed:
  • 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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    JEL classification:

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

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