Banking regulatory constraints and personal bankruptcy filings
61 Pages Posted: 14 Feb 2017 Last revised: 28 Jul 2021
Date Written: July 18, 2021
The economic well-being of a household depends on its access to credit and to a legal system for managing debt overload. Our hypothesis is that the removal of regulatory constraints on a bank’s ability to expand in new geographic markets increases credit access to households, which in turn, contributes to the rise in consumer defaults. We find a net increase in Chapter 13 bankruptcies following a loosening of the state’s restrictions on multi-branch banking, compared to the increase in Chapter 13 bankruptcies in states that did not change their banking rules. The increased mortgage lending after branch deregulation helps explain this rise in Chapter 13 filings, suggesting that homeowners use the Chapter 13 code to save their houses. Further, the effects of the mortgage supply channel are greater in areas with less bank concentration. Overall, our findings are relevant to policymakers in their efforts to either set up a new personal insolvency regime or modify the existing bankruptcy process.
Keywords: Law and Finance; Bank Deregulation; Mortgage Supply; Personal Bankruptcy; Household Finance
JEL Classification: G28; G21; D12; D14; K35
Suggested Citation: Suggested Citation