When Losses Turn into Loans: The Cost of Undercapitalized Banks

Laura Blattner, Luisa Farinha and Francisco Rebelo
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Luisa Farinha: Bank of Portugal
Francisco Rebelo: Boston College

Research Papers from Stanford University, Graduate School of Business

Abstract: We provide evidence that a weak banking sector contributed to low productivity following the European debt crisis. An unexpected increase in capital requirements provides a natural experiment to study the effects of reduced capital adequacy on productivity. Affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. We show that the credit reallocation leads to a reallocation of production factors across firms. We find that the resulting factor misallocation accounts for 20% of the decline in productivity in Portugal in 2012.

JEL-codes: D24 E44 E51 G21 G28 O47 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-ban, nep-eec, nep-eff, nep-fdg and nep-mac
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Citations: View citations in EconPapers (41)

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Related works:
Working Paper: When losses turn into loans: the cost of undercapitalized banks (2019)
Working Paper: When losses turn into loans: the cost of undercapitalized banks (2018)
Working Paper: When Losses Turn Into Loans: The Cost of Undercapitalized Banks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3688

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