Creditor Rights, Systemic Risk and Bank Regulations: Evidence from Cross-Country Study

Abstract

In this paper, we investigate the extent in which creditor rights protection in bankruptcy induces banks to take more risk, leading to a higher level of systemic risk in the financial system. We apply ∆CoVaR, introduced by Adrian and Brunnermeier (2011), as the measure of systemic risk. Our sample uses 744 listed commercial banks and covers 34 countries. Our work shows that more legal protection leads to higher level of systemic risk. This result supports the “dark side” of the strong creditor rights in bankruptcy. We further find that developed countries contribute to the increase of systemic risk while we find neutral impact for developing countries. Moreover, our results hold when we apply different measures for bank risk taking and creditor rights.

Keywords: Creditor rights, bankruptcy code, bank systemic risk, bank regulation

JEL Classification: G01, G21, G28