Lending Quality and Contracts Enforcement Reforms
44 Pages Posted: 17 Feb 2021
Date Written: February 15, 2021
We investigate the causal relationship between the efficiency of country’s judicial system and the quality of bank lending, using the contracts enforcement reforms that have been implemented in four European countries as a quasi-natural experiment. We find that strengthening of contract enforcement determines large, significant, and persistent reductions of banks’ non-performing-loans (NPLs). Our results have important policy implications: they point at judicial efficiency as a key determinant of the stability of the banking sector and its resilience to negative shocks such as the recent COVID-19 pandemic.
Keywords: Judicial Systems, Non-Performing Loans, Banking Stability
JEL Classification: G21, G28
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