Competing Creditor Claims and Banks’ Loan Loss Provisions: Evidence From Anti-Recharacterization Laws

Posted: 27 Nov 2020

See all articles by Yongtae Kim

Yongtae Kim

Santa Clara University - Leavey School of Business

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Janus Jian Zhang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law

Date Written: October 10, 2020

Abstract

The state-level adoption of anti-recharacterization laws (ARL) significantly increases the rights of secured creditors by denying judges’ discretion and allowing buyers of securitized assets to seize the collateral in bankruptcy. We find that banks operating in states that adopt ARL accrue for more loan loss provisions after the adoption. The effect is stronger for banks with higher exposure to the corporate loan market. These findings are consistent with banks competing more with other creditors for collaterals of corporate borrowers after the ARL adoption. In addition, we find that the effect of ARL on loan loss provisions is stronger for banks facing higher competition. Consistent with the competing creditor-claims hypothesis, we also show that the ARL adoption leads to higher future loan charge-offs and a lower growth rate in outstanding corporate loans.

Suggested Citation

Kim, Yongtae and Saffar, Walid and Zhang, Janus Jian, Competing Creditor Claims and Banks’ Loan Loss Provisions: Evidence From Anti-Recharacterization Laws (October 10, 2020). Available at SSRN: https://ssrn.com/abstract=3708627

Yongtae Kim

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Walid Saffar (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

Janus Jian Zhang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law ( email )

Hong Kong

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