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Creditor-friendly laws are generally associated with more credit to the private sector and deeper financial markets. But laws mean little if they are not upheld in the courts. The authors hypothesize that the effectiveness of creditor rights is strongly linked to the efficiency of contract enforcement. This hypothesis is tested using firm level data on 27 European countries in 2002 and 2005. The analysis finds that firms have more access to bank credit in countries with better creditor rights, but the association between creditor rights and bank credit is much weaker in countries with inefficient courts. Exploiting the panel dimension of the data and the fact that creditor rights change over time, the authors show that the effect of a change in creditor rights on change in bank credit increases with court enforcement. In particular, a unit increase in the creditor rights index will increase the share of bank loans in firm investment by 27 percent in a country at the 10th percentile of the enforcement time distribution (Lithuania). However, the increase will be only 7 percent in a country at the 80th percentile of this distribution (Kyrgyzstan). Legal protections of creditors and efficient courts are strong complements.

Access to Finance --- Bank loans --- Bankruptcy and Resolution of Financial Distress --- Banks and Banking Reform --- Contract enforcement --- Creditor --- Creditor Rights --- Creditors --- Debt Markets --- Finance and Financial Sector Development --- Finance Corporation --- Financial markets --- Legal protections --- Legal systems --- Public Disclosure

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Creditor-friendly laws are generally associated with more credit to the private sector and deeper financial markets. But laws mean little if they are not upheld in the courts. The authors hypothesize that the effectiveness of creditor rights is strongly linked to the efficiency of contract enforcement. This hypothesis is tested using firm level data on 27 European countries in 2002 and 2005. The analysis finds that firms have more access to bank credit in countries with better creditor rights, but the association between creditor rights and bank credit is much weaker in countries with inefficient courts. Exploiting the panel dimension of the data and the fact that creditor rights change over time, the authors show that the effect of a change in creditor rights on change in bank credit increases with court enforcement. In particular, a unit increase in the creditor rights index will increase the share of bank loans in firm investment by 27 percent in a country at the 10th percentile of the enforcement time distribution (Lithuania). However, the increase will be only 7 percent in a country at the 80th percentile of this distribution (Kyrgyzstan). Legal protections of creditors and efficient courts are strong complements.

Access to Finance --- Bank loans --- Bankruptcy and Resolution of Financial Distress --- Banks and Banking Reform --- Contract enforcement --- Creditor --- Creditor Rights --- Creditors --- Debt Markets --- Finance and Financial Sector Development --- Finance Corporation --- Financial markets --- Legal protections --- Legal systems --- Public Disclosure

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The paper discusses the main features that distinguish inter-firm international trade finance from alternative sources of financing. On the one hand, inter-firm trade finance could help overcome informational problems associated with other lending relationships; on the other, it may contribute to propagate shocks due to the interconnection among firms along credit chains. The paper evaluates the potential effects of a financial crisis on the use of trade credit for firms operating in developing countries. It argues that while the advantages of trade credit might remain largely unexploited due to poor legal institutions, the disadvantages might be exacerbated because of these firms' greater exposure to a default chain. Based on these arguments, a menu of choices is identified for what policymakers can do to boost firms' access to inter-firm trade finance in times of crisis.

Access to Finance --- Access to financing --- Asymmetric information --- Bankruptcy and Resolution of Financial Distress --- Borrower --- Contract enforcement --- Credit chains --- Debt Markets --- Debts --- Developing countries --- Economic Theory and Research --- Emerging market --- Emerging Markets --- Exporters --- Extensions of credit --- Finance and Financial Sector Development --- Financial crisis --- Financial markets --- Global economy --- International Bank --- International Trade --- Lender --- Monetary Fund --- Private Sector Development --- Trade credit --- Trade Finance --- Trade financing

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The main objective of this paper is to rethink the use of market discipline for prudential purposes in light of lessons from the financial crisis. The paper develops the main building blocks of a market discipline framework, and argues for the need to take an expansive view of the concept. It also illustrates using actual bank case studies from the United States its apparent failures in the crisis, particularly the failure to prevent the buildup of systemic, as opposed to idiosyncratic, risks. However, while the role of market discipline in the design of macro-prudential regulation appears to be largely constrained, more can be done on the micro-prudential side to promote clearer market signals of bank riskiness and to encourage their use in the supervisory process.

Access to Finance --- Accounting --- Bank failure --- Bank management --- Banking supervision --- Banks --- Banks & Banking Reform --- Capital markets --- Capital requirements --- Commercial banks --- Contract enforcement --- Debt Markets --- Emerging Markets --- Finance and Financial Sector Development --- Financial institutions --- Financial regulation --- Financial services --- Financial systems --- Insurance --- Legal protection --- Macroeconomics and Economic Growth --- Mandates --- Market discipline --- Markets and Market Access --- Moral hazard --- Private Sector Development --- Statistical analysis --- Systemic risk

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June 2000 - To improve on the low level and low efficiency of Brazil's financial intermediation (and hence economic growth), Brazil needs reforms leading to a more efficient judicial sector, better enforcement of contracts, stronger rights for creditors, stronger accounting standards and practices, and a legal and regulatory framework that facilitates the exchange of information about borrowers. Reforms to improve both the level and the efficiency of financial intermediation in Brazil should be high on Brazilian policymakers' agendas, because of the financial sector's importance to economic growth. This means that Brazil must also improve the legal and regulatory environment in which its financial institutions operate. Brazil is weak in important components of such an environment: the rights of secured and unsecured creditors, the enforcement of contracts, and the sharing of credit information among intermediaries. Recent reforms, such as the extension of alienacao fiduciaria to housing, the introduction of cedula de credito bancario, the legal separation of principal and interest, and improvements in credit information systems, are useful steps in strengthening the framework. But more is needed. Reforms that will significantly increase the level and efficiency of financial intermediation and have a positive impact on economic growth include: A more efficient judicial sector and better enforcement of contracts; Stronger rights for secured and unsecured creditors; Stronger accounting standards and practices, to improve the quality of information available about borrowers; The development of a legal and regulatory framework that facilitates the exchange among financial institutions of both negative and positive information about borrowers. This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to better understand the link between financial development and economic growth, with application to Brazil. The author may be contacted at tbeck@worldbank.org.

Accounting --- Accounting Standards --- Banks and Banking Reform --- Bond Markets --- Borrowers --- Contract --- Contract Enforcement --- Credit Information --- Credit Information Systems --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Enforceability --- Enforceability Of Contracts --- Enforcement Of Contracts --- Finance and Financial Sector Development --- Financial Development --- Financial Institutions --- Financial Literacy --- Interest --- Liabilities --- Macroeconomics and Economic Growth --- Private Bond --- Private Sector Development --- Regulatory Framework --- Stock --- Stock Markets --- Unsecured Creditors