Preventing Borrower Runs: The Prompt Corrective Action Approach

46 Pages Posted: 1 Oct 2021 Last revised: 2 Feb 2022

See all articles by Nishant Kashyap

Nishant Kashyap

Indian School of Business

Sriniwas Mahapatro

Indian School of Business (ISB), Hyderabad

Prasanna L. Tantri

Indian School of Business

Date Written: September 29, 2021

Abstract

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

Kashyap, Nishant and Mahapatro, Sriniwas and Tantri, Prasanna L., Preventing Borrower Runs: The Prompt Corrective Action Approach (September 29, 2021). Available at SSRN: https://ssrn.com/abstract=3933476 or http://dx.doi.org/10.2139/ssrn.3933476

Nishant Kashyap

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Sriniwas Mahapatro (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Prasanna L. Tantri

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India
9160099959 (Phone)

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