Faculty of Economics and Business Administration Publications Database

How Law Affects Lending

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Authors:
Pistor, Katharina
Vig, Vikrant
Source:
Volume: 23
Number: 2
Pages: 549 - 580
ISSN-Print: 0893-9454
Link External Source: Online Version
Year: 2010
Abstract:

The paper investigates the effect of legal change on the lending behavior of banks in twelve transition economies. First, we find that banks increase the supply of credit subsequent to legal change. Second, changes in collateral law matter more for increases in bank lending than do changes in bankruptcy law. We attribute this finding to the different functions of collateral and bankruptcy law. While the former enhances the likelihood that individual creditors can realize their claims against a debtor, the latter ensures an orderly process for resolving multiple, and often conflicting, claims after a debtor has become insolvent. Finally, we find that foreign-owned banks respond more strongly to legal change than incumbents.

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