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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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    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. Fabiano Schivardi & Enrico Sette & Guido Tabellini, 2017. "Credit misallocation during the European financial crisis," BIS Working Papers 669, Bank for International Settlements.
    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. 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.
    5. Gao, Haoyu & Ru, Hong & Tang, Dragon Yongjun, 2021. "Subnational debt of China: The politics-finance nexus," Journal of Financial Economics, Elsevier, vol. 141(3), pages 881-895.
    6. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
    7. Giacomo Rodano, 2021. "Judicial efficiency and bank credit to firms," Temi di discussione (Economic working papers) 1322, Bank of Italy, Economic Research and International Relations Area.
    8. Michel Alexandre & Thiago Christiano Silva & Krzysztof Michalak & Francisco A. Rodrigues, 2021. "Does Default Pecking Order Impact Systemic Risk? Evidence from Brazilian data," Working Papers Series 557, Central Bank of Brazil, Research Department.
    9. Greta Falavigna & Roberto Ippoliti, 2021. "Legal environment and corporate finance: evidence from the Italian manufacturing industry," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 10(1), pages 1-16, December.
    10. Panagiotis Avramidis & Ioannis Asimakopoulos & Dimitris Malliaropulos, 2021. "Disrupted lending relationship and borrower's strategic default: evidence from the tourism industry during the Greek economic crisis," Working Papers 285, Bank of Greece.
    11. 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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