Beiträge zur Jahrestagung des Vereins für Socialpolitik 2017: Alternative Geld- und Finanzarchitekturen - Session: Banking I A15-V2
Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements. This results in insufficient credit reallocation across sectors and a distorted capital allocation. Reducing the cost of equity and tightening capital requirements can mitigate distortions.