Credit, Crisis and Contract Enforcement: Evidence from the Spanish Loan Market

Abstract

A number of theoretical and empirical studies have shown that the development of credit markets is affected by the efficacy of enforcement institutions. A less explored question is how these institutions interact with turns in the economic cycle and the impact of different types of legal procedures on credit market performance. This paper fills these gaps by analysing how differences in the availability of credit and in non-performing loans ratios may be partially explained by regional variations in the quality of loan contract enforcement during recent periods of sustained growth (2001-2007) and recession (since 2008) in the Spanish economy. This research concludes that a rise in the clearance rate of executions (i.e. when a judge enforces the repayment of a debt) increases the ratio of total credit to GDP. However, the declaratory stage of proceedings (i.e. when a debt is first verified by a judge) does not seem to be statistically significant. A possible explanation of this finding is that, throughout the economic cycle, a significant proportion of the defaults declared are strategic (i.e. defaults by a solvent debtor). Furthermore, it is observed that, in regions where declaratory procedures are more efficient, less credit is declared as non-performing. The latter effect, however, is only observed after the onset of the "Great Recession" in 2008. This may be related to the increase in non-strategic defaults during a downturn.

Keywords: enforcement institutions, legal procedures, credit availability, non-performing loans ratio

JEL Classification: K41, E51, G2