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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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    References listed on IDEAS

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    Cited by:

    1. Drozd, Lukasz A. & Serrano-Padial, Ricardo, 2018. "Financial contracting with enforcement externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 153-189.
    2. 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.
    3. 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.
    4. 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.
    5. Morales-Acevedo, Paola, 2016. "Firms’ Strategic Choice of Loan Delinquencies," Working Paper Series 321, Sveriges Riksbank (Central Bank of Sweden).

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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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