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Bank Quality, Judicial Efficiency and Loan Repayment Delays in Italy

Author

Listed:
  • Fabio Schiantarelli

    (Boston College
    IZA)

  • Massimiliano Stacchini

    (Bank of Italy)

  • Philip E. Strahan

    (Boston College
    NBER)

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.

Suggested Citation

  • Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2016. "Bank Quality, Judicial Efficiency and Loan Repayment Delays in Italy," Boston College Working Papers in Economics 901, Boston College Department of Economics, revised 01 Sep 2019.
  • Handle: RePEc:boc:bocoec:901
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    More about this item

    Keywords

    liquidity risk; bank runs; bank loans;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G3 - Financial Economics - - Corporate Finance and Governance
    • K0 - Law and Economics - - General
    • K2 - Law and Economics - - Regulation and Business Law

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