The Schumpeterian Role of Banks: Credit Reallocation and Capital Structure
Journal
European Economic Review
ISSN
0014-2921
Type
journal article
Date Issued
2020-01
Author(s)
Abstract
Capital reallocation across firms is a key source of productivity gains. This paper studies the ‘Schumpeterian role’ of banks: They liquidate loans to firms with poor prospects and reallocate the proceeds to more successful, expanding firms. To absorb liquidation losses without violating regulatory requirements, banks need to raise costly equity buffers ex ante. To economize on these buffers, they tend to reallocate too little credit and continue lending to weak firms. Tight capital standards, differentiated risk weights and low costs of bank equity facilitate reallocation. If agency costs of outside equity financing are not too high, their ability to reallocate credit renders banks more efficient than direct finance.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Number
121
Eprints ID
259516