The Schumpeterian Role of Banks: Credit Reallocation and Capital Structure

Item Type Journal paper
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.
Authors Keuschnigg, Christian & Kogler, Michael
Journal or Publication Title European Economic Review
Language English
Subjects economics
HSG Classification contribution to scientific community
Refereed Yes
Date January 2020
Publisher Elsevier
Number 121
ISSN 0014-2921
Publisher DOI
Official URL
Depositing User Michael Kogler
Date Deposited 01 Mar 2020 16:08
Last Modified 20 Jul 2022 17:41


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Keuschnigg, Christian & Kogler, Michael (2020) The Schumpeterian Role of Banks: Credit Reallocation and Capital Structure. European Economic Review, (121). ISSN 0014-2921

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