Banks and the Schumpeterian creative destruction
Better capitalized banks can more easily absorb larger writeoffs and, in turn, liquidate and reallocate credit more frequently. Banks help shape comparative advantage by shifting investment and output to the innovative sector. Second, institutional reforms such as better investor protection and more efficient bankruptcy laws make bank equity cheaper, and enable banks to extract more capital when liquidating non-performing loans. This induces more credit reallocation and shifts final investment and output to the expanding sector. Countries with strong institutions thus tend to enjoy a comparative advantage in innovative industries.
Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage
Authors: Christian Keuschnigg
From: University of St. Gallen
Energy innovation: which countries fare best?
The Global Innovation Index analyses the energy innovation landscape of the next decade and identifies possible breakthroughs in fields such as energy production, storage, distribution, and consumption.
Source: Global Innovation Index 2018 – WIPO
Bank health and innovation
Chodorow-Reich and Falato argue that bank health is transmitted to the real economy via the covenant channel since less healthy lenders use covenant violations to contract credit. As a result:
[…]firms with less collateral, such as R&D intensive firms, may also have higher violation rates because of the substitutability of collateral and covenant tightness as protection for lenders. Whether the covenant channel focuses credit reductions on the riskiest borrowers or on R&D intensive borrowers with a high growth path matters for the welfare implications.
The Loan Covenant Channel: How Bank Health Transmits to the Real Economy
Authors: Gabriel Chodorow-Reich, Antonio Falato
From: Harvard University, Federal Reserve Board
