Daniela Fabbri

Does Poor Legal Enforcement Make Households Credit-Constrained?

This paper analyzes the relation between the quality of the legal enforcement of loan contracts and the allocation of credit to households, both theoretically and empirically. We use a model of household credit market with secured debt contracts, where the judicial system affects the cost incurred by banks to actually repossess the collateral. The model shows that the working of the judicial system affects both the probability of being credit-constrained and the equilibrium amount of debt. In the empirical part, we test our predictions using data on Italian households and on the performance of Italian judicial districts. Controlling for household characteristics, unobserved heterogeneity at judicial district level and aggregate shocks, we document that an increment in the backlog of trials pending has a statistically and economically significant positive effect on the household probability of being turned down from the credit. Endowing the households living in high-cost judicial districts like Campobasso or Caltanissetta (in southern Italy) with the best enforcement in the sample would reduce the probability of their being credit-constrained by 70% and 63%, respectively. This effect is stronger for poorer than for wealthier households. Moreover, we document that an increment in the backlog of trials pending reduces the availability of credit for poorer households but, surprisingly, has the opposite effect on wealthy households, whose debt volume increases. Again, this effect is found to be significant both statistically and economically.

Short-Selling Bans and Bank Stability

In both the subprime crisis and the euro-area crisis, regulators imposed bans on short sales, aimed mainly at preventing stock price turbulence from destabilizing financial institutions. Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones, and these increases were larger for more vulnerable financial institutions. To take into account the endogeneity of short sales bans, we match banned financial institutions with unbanned ones of similar size and riskiness, and instrument the 2011 ban decisions with regulators’ propensity to impose a ban in the 2008 crisis.

Emerging issues in financial institutions and markets

On 11–12 December 2012, the third Emerging Scholars in Banking and Finance conference took place at Cass Business School, City University London. The conference was jointly organized by the Centre ...

In Kind Finance, Collateral and Cheap Trade Credit

The paper investigates the determinants of trade credit demand and its interactions with the input combination of the firm, within an incomplete contract setting with uncertainty, two-input technology and collateralised credit contracts. Assuming that the supplier is better able to extract value from existing assets and that she has an information advantage relative to other creditors, the paper derives the following predictions: (1) financially unconstrained firms (with unused bank credit lines) take trade credit because it is in fact cheaper than bank loans; (2) the reliance on trade credit may be invariant to the degree of credit rationing, depending on product characteristics; (3) trade credit demand (supply) varies among firms using (producing) differentiated or standardised inputs, rather than services; (4) suppliers lend goods to their customers but they do not lend them cash; (5) a larger use of trade credit goes together with an input choice biased towards tangible assets; (6) both financing and input choices respond to changes in the degree of creditor protection.

Firms’ trade-financing decisions during crises

The bursting of the subprime mortgage market in the United States in 2008 and the ensuing global financial crisis were associated with a rapid decline in global trade. The extent of the trade collapse was unprecedented: trade flows fell at a faster rate than had been observed even in the early years of the great depression. G-20 leaders held their first crisis-related summit in November 2008. The goal was to understand the root causes of the global crisis and to reach consensus on actions to address its immediate effects. In the case of trade, a key question concerned the extent to which a drying up of trade finance caused the observed decline in trade flows. This book brings together a range of projects and studies undertaken by development institutions, export credit agencies, private bankers, and academics to shed light on the role of trade finance in the 2008-09 great trade collapse. It provides policy makers, analysts, and other interested parties with analyses and assessments of the role of governments and institutions in restoring trade finance markets. A deeper understanding of the complexity of trade finance remains critical as the world economy recovers and the supply of trade finance improves. The international community continues to know too little about the fragility of low income economies in response to trade finance developments and shocks, as well as about the ability and conditions of access to trade finance by small and medium enterprises and small banks in developing countries. Similarly, there is uncertainty regarding the impact on trade finance of recent changes in the third Basel regulatory framework.Firms procure funds not only from specialized financial intermediaries, but also from suppliers, generally by delaying payments. The empirical evidence on trade credit raises questions that are hard to reconcile with existing theories: • What justifies the widespread use of trade credit by financially unconstrained firms that have access to seemingly cheaper alternative sources? • Why is the reliance on trade credit not always increasing in the degree of credit rationing? • Does input lending affect the borrower’s choice of inputs? • Does the degree of creditor protection affect financing and input choices? This chapter addresses these questions in a unified framework.