Preventing Borrower Runs: The Prompt Corrective Action Approach
46 Pages Posted: 1 Oct 2021 Last revised: 2 Feb 2022
Date Written: September 29, 2021
We ask whether regulatory intervention in the form of prompt corrective action that seeks to bring troubled banks back to health by imposing temporary restrictions and increasing regulatory monitoring reverses borrower runs. Using the Indian PCA regime and exploiting the sharp discontinuity provided by the entry criteria in a regression discontinuity framework, we find that timely regulatory intervention reduces loan delinquency by way of borrower runs by 93%. Cross-sectional tests based on regional variation in court efficiency and the relationship between economic shocks and delinquency show that a reduction in strategic default leads to improvement in loan performance.
Keywords: Borrower Run, Prompt Corrective Action, Strategic Default, Banking Regulation
JEL Classification: M41, M48, G21, G28, E58
Suggested Citation: Suggested Citation