Bankruptcy: Law Enforcement and Bank Credit

The quality of law enforcement is key to the well-functioning of an economy. This work studies the effects of the quality of Bankruptcy Law enforcement on the Bank Credit Market. A series of Italian Bankruptcy Law reforms, aiming to facilitate debt renegotiation and business continuation, allows us to disentangle how a change of creditor rights affects Bank Credit Market for SMEs. This book sheds light on the impacts of enforcement quality on firms’ financing conditions, utilizing heterogeneity in court efficiency as an exogenous source of cross-sectional variation in the quality of the enforcement itself. We find that court (in)efficiency amplifies the effects of the reforms. When creditor rights shrink, SMEs operating in less efficient judicial districts experience a larger contraction of credit volumes as well as a stronger rise of bank lending rates, implying credit rationing. Effects are not uniformly distributed, but are stronger for riskier, unsecured and new credits. Findings show that even reforms originally aimed to facilitate access to credit may indeed have “unintended” consequences, which enforcement quality exacerbates.