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Schumpeterian Banks: Credit Reallocation and Capital Structure

Christian Keuschnigg and Michael Kogler

No 12443, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit reallocation to expanding industries and results in a distorted investment process and low aggregate productivity. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions.

Keywords: Banking; credit reallocation; finance and growth; regulations (search for similar items in EconPapers)
JEL-codes: D92 G21 G28 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-fdg
Date: 2017-11
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