The Impact of Legislation on Credit Risk—Comparative Evidence From the United States, the United Kingdom and Germany
IMF Working Papers, March 1, 2011
Source details
- Canonical URL
- The Impact of Legislation on Credit Risk—Comparative Evidence From the United States, the United Kingdom and Germany
Other formats
Bibliographic details
- Authors: Philipp Schmieder, Christian Schmieder
- Published: March 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455220991.001
Overview
- Study investigates the link between bankruptcy and security legislation and potential credit losses faced by banks based on a cross-country study for the United States (US), the United Kingdom (UK) and Germany.
- Focus: corporate credit.
- Authors: Philipp Schmieder, Christian Schmieder.
- Publication date: March 1, 2011.
Key findings
- Legislation produces the highest credit risk in the US, followed by Germany, while UK law is found to be most favorable for banks.
- US banks gain from the higher number of informal restructurings (without losses) but lose from the low level of recovery in formal proceedings.
- German banks demand more credit risk mitigants than UK and US banks do, but still recover less than do UK banks.
Comparative quantifications and specific comparative statements
- To be at par with UK banks, US banks would have to recover more than twice as much in formal proceedings.
- German proceedings would have to be shortened by about one half to be at par with UK banks.
Implications and policy-relevant observations
- Differences in bankruptcy and security legislation materially affect bank credit risk through (a) incidence of informal restructurings, (b) recovery rates in formal proceedings, and (c) duration of formal proceedings.
- Policy levers suggested by the comparative results:
- Increase recoveries in US formal proceedings to reduce credit risk exposure to UK-comparable levels (requires recoveries of more than twice current US formal recovery levels).
- Shorten German formal proceedings by about one half to achieve parity with UK outcomes.
- Consider regulatory and legal reforms that affect the balance between informal restructurings and formal proceedings to optimize bank recovery outcomes.
Source: The Impact of Legislation on Credit Risk—Comparative Evidence From the United States, the United Kingdom and Germany, IMF Working Paper No. 2011/055.