182,710 research outputs found

    Passive Creditors

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    Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomenons in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.http://deepblue.lib.umich.edu/bitstream/2027.42/40123/3/wp737.pd

    Passive Creditors

    Get PDF
    Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomenons in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.creditor passivity, bankruptcy, arrears, bad loans, bank closure

    Passive Creditors

    Get PDF
    Creditors are often passive because they are reluctant to show bad debts on their balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transitional and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomena in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.creditor passivity, bankruptcy, arrears, bad loans, bank closure

    Piercing the Corporate Veil by Tort Creditors

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    This Article reviews the corporate veil-piercing tests courts are increasingly using to grant leniency to tort creditors and the justifications that are most likely to predict veil piercing success by such creditors. This Article concludes that courts tend to use the same veil piercing test for both contract and tort creditors, but re-weigh the factors that are influential in predicting such veil-piercing outcomes

    Protection for whom? creditor conflicts in bankruptcy

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    Revised. In this article we provide a rationale for bankruptcy law that is based on the conflicts among creditors that occur when a debtor’s liabilities exceed its assets. In the absence of a bankruptcy law, the private debt-collection remedies that creditors pursue when a debtor is insolvent result in an ad hoc disposal of the debtor’s assets, thereby reducing the aggregate value of creditors’ claims. We show that coordination clauses can be used by creditors in their loan agreements that will result in coordination, ex post. Although all creditors would benefit from including these clauses in their contracts, they nevertheless choose not to in precisely those circumstances in which it is desirable to coordinate. This is an important insight because previous theories supporting a role for bankruptcy law are based on the notion that creditors want to contract about bankruptcy, but cannot. In contract, we demonstrate that creditors will choose not to coordinate ex ante, even though it is in their best interest ex post. ; We also examine a variety of other contractual mechanisms, including covenants and seniority, and show that although including these terms in loan contracts can improve creditors’ incentives to write coordination clauses, they do so only in special circumstances. Our analysis of creditor conflicts and the potential for private contracting remedies provides an economic rationale for the existence of a bankruptcy law that mandates ex post coordination among the creditors of an insolvent debtor.Bankruptcy

    Directors\u27 Duties in Failing Firms

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    Despite many cases with seemingly contrary dicta, corporate directors of failing firms do not have special duties to creditors. This follows from the nature of fiduciary duties and the business judgment rule. Under the business judgment rule, the directors have broad discretion to decide what to do and in whose interests to act. There is some authority for a limited creditor right to sue on behalf of the corporation to enforce this duty. However, any such right does not make the duty one owed to creditors. The creditors individually may sue the corporation for breach of specific contractual, tort, and statutory duties, particularly on account of fraudulent conveyances. But the creditors are not owed general fiduciary protection even if they are subject to a special risk of abuse in failing firms

    Signalling Effects of a Large Player in a Global Game of Creditor Coordination

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    In case of multiple creditors a coordination problem can arise when the borrowing firm runs into financial distress. Even if the project's value at maturity is enough to pay all creditors in full, some creditors may be tempted to foreclose on their loans. We develop a model of creditor coordination where a large creditor moves before a continuum of small creditors, and analyze the signalling effects of the large creditor''s investment decision on the subsequent behavior of the small creditors. The signalling effects crucially depend on the relative size of the large creditor and the relative precision of information. We derive conditions under which pure herding behavior is to be expected.

    Signalling effects of a large player in a global game of creditor coordination

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    In case of multiple creditors a coordination problem can arise when the borrowingfirm runs into financial distress. Even if the project's value at maturity is enoughto pay all creditors in full, some creditors may be tempted to foreclose on theirloans. We develop a model of creditor coordination where a large creditor movesbefore a continuum of small creditors, and analyze the signalling effects of the largecreditor's investment decision on the subsequent behavior of the small creditors. Thesignalling effects crucially depend on the relative size of the large creditor and therelative precision of information. We derive conditions under which pure herdingbehavior is to be expected. --creditor coordination,global games

    Political Risk and Sovereign Debt Contracts

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    Default on sovereign debt is a form of political risk. Issuers and creditors have responded to this risk both by strengthening the terms in sovereign debt contracts that enable creditors to enforce their debts judicially and by creating terms that enable sovereigns to restructure their debts. These apparently contradictory approaches reflect attempts to solve an incomplete contracting problem in which debtors need to be forced to repay debts in good states of the world; debtors need to be granted partial relief from debt payments in bad states; debtors may attempt to exploit divisions among creditors in order to opportunistically reduce their debt burden; and debtors and creditors may attempt to externalize costs on the taxpayers of other countries. We support this argument with an empirical overview of the development of sovereign bond terms from 1960 to the present

    Beyond Balancing the Interests of Creditors and Developing States

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    The traditional view of sovereign debt as a relationship between a developing country government and and its foreign private creditors is increasingly out of date. Financial institutions and individuals inside the borrowing countries are are becoming more and more important as creditors to their governments. At the same time, as countries remove restrictions on cross-border capital flows, foreign creditors are participating more actively in domestic law, local-currency debt markets. These developments imply fundamental changes in lending decisions and, where the loan goes bad, in the sovereign debt workout process
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