Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy
Fabio Schiantarelli (),
Massimiliano Stacchini and
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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
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)
New Economics Papers: this item is included in nep-ban
Date: 2016-02-15, Revised 2016-08-12
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Working Paper: Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy (2016)
Working Paper: Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:901
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