Debt Restructuring and the Role of Lending Technologies

53 Pages Posted: 29 Oct 2010

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2010

Abstract

The literature on debt restructuring usually assumes that banks behave in a uniform way towards firms in distress. Using a recent survey of Italian banks, we show that banks follow different strategies when they decide whether to take part in the workout process, in that some of them do restructure their debt claims towards small and medium-sized enterprises in distress, while others do not. We explain this heterogeneity by considering the role of banks’ internal organization and lending technologies, which the literature has shown to be strictly tied to the type of relationship developed with the borrower (transactional versus relationship lending). We find that the probability of debt restructuring is higher when the bank: i) is geographically closer to borrowing firms; ii) relies more on soft than hard information; and iii) adopts a decentralized structure with more power allocated to local managers. However there are important complementarities among organizational variables: the adoption of credit scoring increases the likelihood of restructuring if banks also use these techniques systematically in the monitoring process and if they adopt more decentralized structures. Bank size per se is not able to fully explain this heterogeneous behaviour, as organizational forms and lending technologies may also have important consequences on bank decisions.

Keywords: financial distress, debt restructuring, small and medium-sized enterprises (SMEs), bank heterogeneity, bank organization, lending technologies

JEL Classification: G21, G33, L2, O3

Suggested Citation

Micucci, Giacinto and Rossi, Paola, Debt Restructuring and the Role of Lending Technologies (June 30, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 763. Available at SSRN: https://ssrn.com/abstract=1699625 or http://dx.doi.org/10.2139/ssrn.1699625

Giacinto Micucci (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Paola Rossi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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