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

Juan S. Mora Sanguinetti, Marta Martínez-Matute and Miguel García-Posada

The Bank of Spain has analysed the relationship between how the Spanish court system operates and access to credit and default on the part of financial institutions in a number of Spanish towns.

The document concludes that an effective legal system helps access to credit; in particular, it notes that this trend is most apparent in the judicial execution phase, whereas it does not have such an impact at the earlier, statement-giving phase of the litigation process, possibly because at that point non-compliance events are more strategic (debtors are solvent).

As to the relationship with default, the report concludes that during an economic crisis the efficiency of the judicial system has a greater impact on the testimonial phase of the process. This can be explained by the fact that non-compliances are not strategic, but rather due to lack of solvency, since lenders have lower cash flows and less collateral.