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The Schumpeterian role of banks: Credit reallocation and capital structure

Christian Keuschnigg and Michael Kogler

European Economic Review, 2020, vol. 121, issue C

Abstract: Capital reallocation across firms is a key source of productivity gains. This paper studies the ‘Schumpeterian role’ of banks: They liquidate loans to firms with poor prospects and reallocate the proceeds to more successful, expanding firms. To absorb liquidation losses without violating regulatory requirements, banks need to raise costly equity buffers ex ante. To economize on these buffers, they tend to reallocate too little credit and continue lending to weak firms. Tight capital standards, differentiated risk weights and low costs of bank equity facilitate reallocation. If agency costs of outside equity financing are not too high, their ability to reallocate credit renders banks more efficient than direct finance.

Keywords: Banking; Credit reallocation; Bank regulation; Finance and growth (search for similar items in EconPapers)
JEL-codes: D92 G21 G28 G33 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.euroecorev.2019.103349

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