Lending quality and contracts enforcement reforms

We investigate the causal relationship between the efficiency of country's judicial system and the quality of bank lending, using the contracts enforcement reforms implemented in four European countries as a quasi‐natural experiment. We find that strengthening contracts enforcement determines large, significant and persistent reductions in banks' nonperforming loans. Our results have important policy implications: they point at judicial efficiency as a critical determinant of the stability of the banking sector and its resilience to adverse shocks such as the recent Covid‐19 pandemic.