Topic: Bank Quality, Judicial Efficiency and Borrower Runs: the Case of Loan Repayment Delays

Speaker: Philip E. Strahan, Professor in Finance, Carroll School of Management, Boston College

Date: November 12th (Thursday.)

Time: 2:00-3:30pm

Location: Building 4, Room 101

Language: English

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 runs 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 likelihood of bank survival comes into doubt.

About the speaker:

Philip E. Strahan holds the John L. Collins, S.J. Chair in Finance at the Carroll School of Management, Boston College. He is also a Faculty Research Fellow at the National Bureau of Economic Research, and a Fellow at the Wharton Financial Institutions Center. Previously, Professor Strahan spent seven years in the Research and Market Analysis Group of the Federal Reserve Bank of New York. He received a Ph.D. in Economics from the University of Chicago in 1993. Professor Strahan’s research interests include the structure, efficiency and risk management practices of the financial services industry. He has articles published in the American Economic Review, Journal of Finance, Journal of Financial Economics, and Review of Financial Studies, among others. Professor Strahan is also an editor of the Journal of Financial Intermediation.