Corporate Runs and Credit Reallocation

We study how corporate clients’ behavior on both sides of bank balance sheet shapes bank distress. Exploiting the 2017 regional bank failures in Italy, we show that corporate clients withdraw their deposits and that creditworthy firms switch to healthier banks at the first signs of weakness. This deteriorates loan portfolio quality and erodes capital ratios at distressed banks, amplifying fragility. The inflow of high-quality borrowers from the distressed banks allows the receiving banks to reallocate credit away from their own risky borrowers. Timely recapitalizations and targeted interventions that discourage the premature exit of high-quality borrowers may help mitigate bank fragility.