Discussion Paper Details

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Title: Schumpeterian Banks: Credit Reallocation and Capital Structure

Author(s): Christian Keuschnigg and Michael Kogler

Publication Date: November 2017

Keyword(s): Banking, credit reallocation, finance and growth and regulations

Programme Area(s): Financial Economics and Public Economics

Abstract: Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit reallocation to expanding industries and results in a distorted investment process and low aggregate productivity. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions.

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Bibliographic Reference

Keuschnigg, C and Kogler, M. 2017. 'Schumpeterian Banks: Credit Reallocation and Capital Structure'. London, Centre for Economic Policy Research.