Corporate Runs and Credit Reallocation (joint with Elena Carletti, Filippo De Marco, and Enrico Sette)

Abstract

We study how corporate clients react to bank distress on both sides of the bank's balance sheet, exploiting the 2017-failure of two regional banks in Italy. We find that deposit outflows from firms begin before households as soon as the banks’ distress becomes public. Firms run simultaneously on the asset-side, applying for credit and establishing new lending relationships with larger and better capitalized banks. Low-risk firms with single-relationship are the first to leave, endogenously eroding the banks’ loan portfolio in the period leading-up to widespread deposit runs and the banks’ eventual collapse. These borrower runs trigger significant spillover effects on other banks in the region. High-risk borrowers, unable to leave the distressed banks, experience a decrease in credit availability and reduce investment.