Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy

58 Pages Posted: 10 Nov 2016

See all articles by Fabio Schiantarelli

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Massimiliano Stacchini

Bank of Italy

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 21, 2016

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 behaviour 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 on their health. This ‘selective’ default increases where legal enforcement is weak. Poor enforcement can therefore create a systematic loan risk by encouraging borrowers to default en masse once the continuation value of their bank relationships comes into doubt.

Keywords: bank lending, financial distress

JEL Classification: G2

Suggested Citation

Schiantarelli, Fabio and Stacchini, Massimiliano and Strahan, Philip E., Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy (July 21, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1072, Available at SSRN: https://ssrn.com/abstract=2867396 or http://dx.doi.org/10.2139/ssrn.2867396

Fabio Schiantarelli

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-4512 (Phone)
617-552-2308 (Fax)

HOME PAGE: http://https://sites.google.com/a/bc.edu/fabio-schiantarelli/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Massimiliano Stacchini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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