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Bank Quality, Judicial Efficiency and Loan Repayment Delays in Italy

Fabio Schiantarelli (), Massimiliano Stacchini and Philip Strahan
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Massimiliano Stacchini: Bank of Italy
Philip Strahan: Boston College

No 901, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Exposure to liquidity risk makes banks vulnerable to runs from both depositors and from wholesale, short-term investors. This paper shows empirically that banks are also vulnerable to run-like behavior from borrowers who delay their loan repayments (default). Firms in Italy defaulted more against banks with high levels of past losses. We control for borrower fundamentals with firm-quarter fixed effects; thus, identification comes from a firm’s choice to default against one bank versus another, depending upon their health. This ‘selective’ default increases where legal enforcement is weak. Poor enforcement thus can create a systematic loan risk by encouraging borrowers to default en masse once the continuation value of their bank relationships comes into doubt.

Keywords: liquidity risk; bank runs; bank loans (search for similar items in EconPapers)
JEL-codes: G0 G3 K0 K2 (search for similar items in EconPapers)
Date: 2016-02-15, Revised 2019-09-01
New Economics Papers: this item is included in nep-ban
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Forthcoming, Journal of Finance

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