NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy

Fabio Schiantarelli, Massimiliano Stacchini, Philip E. Strahan

NBER Working Paper No. 22034
Issued in February 2016, Revised in August 2016
NBER Program(s):Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w22034

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