Creditor Passivity: The Effects of Bank Competition and Institutions on the Strategic Use of Bankruptcy Filings

Hainz, Christa (September 2007): Creditor Passivity: The Effects of Bank Competition and Institutions on the Strategic Use of Bankruptcy Filings. Discussion Papers in Economics 2007-32

Abstract

Why do banks remain passive? In a model of bank-firm relationship we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm’s type to its competitors. Thereby, asymmetric information between banks is reduced and bank competition intensifies. We find that the better the institutions and the more competitive the banking sector, the higher the bank’s incentive to bankrupt defaulting firms. This makes information between banks less asymmetric and thus leads to lower interest rates and less credit rationing.

• Item Type: Paper
• Keywords: Creditor passivity, bank competition, information sharing, institutions, bankruptcy, relationship banking
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Financial Markets; Economics > Munich Discussion Papers in Economics > Economics of Information; Economics > Chairs > Seminar for Comparative Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: G21, G33, K10, D82
• Language: English