Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy

Abstract

Italian rms delay payment to banks weakened by past loan losses. Exploiting Credit Register data, we fully absorb borrower fundamentals with rm-quarter eects; thus, identication reects rm choices to delay payment to some banks but not others, depending upon their health. This selective delay occurs more where legal enforcement of collateral recovery is slow. Poor enforcement encourages borrowers not to pay, once the value of their bank relationship comes into doubt. Selective delays occur even by rms able to pay all lenders. Credit losses in Italy have thus been worsened by the combination of weak banks and weak legal enforcement. The long and deep recession after the nancial and foreign debt crises in Europe has left a legacy of non-performing loans on Italian banks' balance sheets. In December of 2015, bad loans summed to about 200 billion, a large gure that represents approximately 11% of the * Fabio Schiantarelli is with Boston College and IZA, Massimiliano Stacchini is with Bank of Italy, Philip E. Strahan is with Boston College and NBER. None of the authors received nancial support, other than their normal salaries from their institutions. The article has been reviewed by the Bank of Italy, but the views expressed in it are those of the authors' alone and do not necessarily represent those of the institutions with which they are aliated We are grateful to

Judicial Efficiency and Firms Growth: Evidence from Pakistan

“…A recent study by Miroshnychenko, bozziy and barontini (2019) shows that protection of rightsof investors through courts, contributes significantly to the growth of a firm. Schiantarelli, Stacchini, and Strahan (2020) provide support to this view. They found that in the presence of weak enforcement of law, even solvent borrowers try to delay their debt repayment, hence the growth of firms is adversely affected.…”

“…Bae and Goyal ( 2009) report that in inefficient judicial systems, recovery rates are lower. Recently, the findings of the study conducted by Schiantarelli, Stacchini, and Strahan (2020) in Italy show that borrowers selectively delay payment to banks already weakened by past bad loans while continuing to pay healthier banks.…”

“…A recent study by Miroshnychenko, Bozziy and Barontini (2019) states that judicial efficiency plays an important role in investment decisions of a firm. Schiantarelli, Stacchini, and Strahan (2020) provide evidence from Italian firms that weak financial position and inefficient judicial enforcement mechanisms reduces the probability of the borrower to repay their loans. They reveal that in case of weak enforcement of law the safest borrowers usually delay the repayment of loans to least monitored banks, hence the investors are unprotected.…”

Judicial Efficiency and Bank Credit to Firms

“…By lengthening the time to recover bad loans, court inefficiency might increase the stock of NPLs on banks' balance sheet. It could also change the incentives of creditors to repay their obligations (Schiantarelli et al, 2020), thereby affecting the flow of new NPLs. In the analysis, the stock of NPLs is approximated with a dummy variable which takes the value of one if there are some NPLs at the firm-bank match.…”

“…The variation in courts enforcement has been exploited to address different research questions by Ponticelli and Alencar (2016) and Schiantarelli et al (2020). The first paper uses the differences in the functioning of Brazilian courts to analyze the effect of a reform of the Brazilian bankruptcy law on firms productivity and credit access.…”