Schumpeterian Banks: Credit Reallocation and Capital Structure

40 Pages Posted: 20 Nov 2017

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Michael Kogler

University of St. Gallen

Date Written: November 2017

Abstract

Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit reallocation to expanding industries and results in a distorted investment process and low aggregate productivity. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions.

Keywords: Banking, credit reallocation, finance and growth, regulations

JEL Classification: D92, G21, G28, G33

Suggested Citation

Keuschnigg, Christian and Kogler, Michael, Schumpeterian Banks: Credit Reallocation and Capital Structure (November 2017). CEPR Discussion Paper No. DP12443, Available at SSRN: https://ssrn.com/abstract=3074442

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael Kogler

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

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