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When losses turn into loans: the cost of undercapitalized banks
2018
Autores
Ano de Divulgação
2018
Código JEL
D24 - Production; Capital and Total Factor Productivity; Capacity
E51 - Money Supply; Credit; Money Multipliers
G21 - Banks; Other Depository Institutions; Mortgages
G38 - Government Policy and Regulation
O47 - Measurement of Economic Growth; Aggregate Productivity
Resumo
We provide evidence that a weak banking sector has contributed to low productivity
growth following the European sovereign debt crisis. An unexpected increase in capital
requirements for a subset of Portuguese banks in 2011 provides a natural experiment
to study the effects of reduced bank capital adequacy on productivity. Affected banks
respond not only by cutting back on lending but also by reallocating credit to firms in
financial distress with prior underreported loan loss provisioning. We develop a method to
detect when banks delay loss reporting using detailed loan-level data. We then show that
the credit reallocation leads to a reallocation of production factors across firms. A partial
equilibrium exercise suggests that the resulting increase in factor misallocation accounts
for 20% of the decline in productivity in Portugal in 2012.
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