DP12443 Schumpeterian Banks: Credit Reallocation and Capital Structure
|Author(s):||Christian Keuschnigg, Michael Kogler|
|Publication Date:||November 2017|
|Keyword(s):||Banking, credit reallocation, finance and growth, regulations|
|JEL(s):||D92, G21, G28, G33|
|Programme Areas:||Public Economics, Financial Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12443|
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.