Credit, crisis and contract enforcement: evidence from the Spanish loan market

Juan Mora-Sanguinetti, Marta Martínez-Matute () and Miguel Garcia-Posada

European Journal of Law and Economics, 2017, vol. 44, issue 2, No 9, 383 pages

Abstract: Abstract A number of theoretical and empirical studies have shown that the development of credit markets is affected by the efficacy of enforcement institutions. A less explored question in this context is how these institutions interact with turns in the economic cycle and the impact of different types of legal procedures on credit market performance. This paper fills these gaps by analyzing how differences in the availability of credit and the evolution of non-performing loans ratios may be partially explained by regional variations in the quality of loan contract enforcement during recent periods of sustained growth (2001–2007) and recession (since 2008) in the Spanish economy. This research concludes that a rise in the clearance rate of executions (i.e., when a judge enforces the repayment of a debt) increases the ratio of total credit to GDP. However, the declaratory stage of the procedure (i.e., when a debt is firstly verified by a judge) does not seem to be statistically significant. A possible explanation to this finding is that, throughout the economic cycle, a relevant proportion of the defaults that take place are strategic (i.e., defaults by a solvent debtor). Furthermore, it is observed that, in regions where declaratory procedures are more efficient, less credit is declared as non-performing. The latter effect, however, is only observed after the onset of the “Great Recession” in 2008. This may be related to the increase of non-strategic defaults during a downturn.

Keywords: Enforcement institutions; Legal procedures; Credit availability; Non-performing loans ratio (search for similar items in EconPapers)
JEL-codes: E51 G2 K41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (20)

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DOI: 10.1007/s10657-017-9557-4

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