Working Paper: NBER ID: w22034
Authors: Fabio Schiantarelli; Massimiliano Stacchini; Philip E. Strahan
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: bank quality; judicial efficiency; borrower runs; loan repayment delays; Italy
JEL Codes: G02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banks with high levels of past bad loans (G21) | loan repayment delays (G51) |
| Weak legal enforcement (P37) | likelihood of borrower defaults (G33) |
| Weak banks (G21) | delay repayments (G51) |
| Firm size (L25) | repayment behavior (G51) |
| Interaction between bank health and judicial efficiency (G21) | repayment delays (G51) |
| Financially healthy firms + weak enforcement (G32) | delay repayments (G51) |