When losses turn into loans: the cost of undercapitalized banks

Luísa Farinha and Francisca Rebelo
Authors registered in the RePEc Author Service: Laura Blattner

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We provide evidence that a weak banking sector has contributed to low productivity growth following the European sovereign debt crisis. An unexpected increase in capital requirements for a subset of Portuguese banks in 2011 provides a natural experiment to study the effects of reduced bank capital adequacy on productivity. Affected banks respond not only by cutting back on lending but also by reallocating credit to firms in financial distress with prior underreported loan loss provisioning. We develop a method to detect when banks delay loss reporting using detailed loan-level data. We then show that the credit reallocation leads to a reallocation of production factors across firms. A partial equilibrium exercise suggests that the resulting increase in factor misallocation accounts for 20% of the decline in productivity in Portugal in 2012.

JEL-codes: D24 E51 G21 G38 O47 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-eec, nep-eff and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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https://www.bportugal.pt/sites/default/files/anexos/papers/wp201816.pdf

Related works:
Working Paper: When losses turn into loans: the cost of undercapitalized banks (2019)
Working Paper: When Losses Turn into Loans: The Cost of Undercapitalized Banks (2018)
Working Paper: When Losses Turn Into Loans: The Cost of Undercapitalized Banks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201816

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