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Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other creditors. If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.
Access to Finance --- Bankruptcies --- Bankruptcy and Resolution of Financial Distress --- Bankruptcy laws --- Cost of debt --- Creditor --- Creditor claims --- Debt --- Debt Markets --- Deposit Insurance --- Emerging Markets --- Finance and Financial Sector Development --- Financial markets --- Government interventions --- Private Sector Development --- Reorganizations --- Risk Factors
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Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other creditors. If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.
Access to Finance --- Bankruptcies --- Bankruptcy and Resolution of Financial Distress --- Bankruptcy laws --- Cost of debt --- Creditor --- Creditor claims --- Debt --- Debt Markets --- Deposit Insurance --- Emerging Markets --- Finance and Financial Sector Development --- Financial markets --- Government interventions --- Private Sector Development --- Reorganizations --- Risk Factors
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This paper investigates how government interventions into banking systems such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. This debate is important because the pricing of banking products has implications for borrower and depositor welfare. Exploiting data for 124 countries that witnessed different policy responses to 41 banking crises, and using difference-in-difference estimations, the paper presents the following key results: (i) Government interventions reduce Lerner indices and net interest margins. This effect is robust to a battery of falsification and placebo tests, and the competitive response also cannot be explained by alternative forces. The competition-increasing effect on Lerner indices and net interest margins is also confirmed once the non-random assignment of interventions is accounted for using instrumental variable techniques that exploit exogenous variation in the electoral cycle and in the design of the regulatory architecture across countries. (ii) Consistent with theoretical predictions, the competition-increasing effect of government interventions is greater in more concentrated and less contestable banking sectors, but the effects are mitigated in more transparent banking systems. (iii) The competitive effects are economically substantial, remain in place for at least 5 years, and the interventions also coincide with an increase in zombie banks. The results therefore offer direct evidence of the mechanism by which government interventions contribute to banks' risk-shifting behavior as reported in recent studies on bank level runs via competition. (iv) Government interventions disparately affect bank customers' welfare. While liquidity support, recapitalizations, and nationalizations improve borrower welfare by reducing loan rates, deposit rates decline. The empirical setup allows quantifying these disparate effects.
Access to Finance --- Bailouts --- Banking competition --- Bankruptcy and Resolution of Financial Distress --- Banks & Banking Reform --- Borrower and depositor welfare --- Debt Markets --- Deposit Insurance --- Finance and Financial Sector Development --- Government interventions --- Macroeconomics and Economic Growth --- Zombie banks
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The paper discusses the reasons for supporting international trade finance during a liquidity crisis. Targeted interventions are justified when prices are rigid and sellers insist on immediate payment due to fears of strategic default. In this case, buyers who reject the seller's offer fail to internalize the seller's benefit from additional liquidity. A general infusion of credit will not facilitate the beneficial transaction, but an infusion targeted at the buyer's bank's trade finance supply will do so. Since there is a need for interventions in one country to benefit actors in another, international coordination is called for.
Access to Finance --- Asymmetric information --- Bank credit --- Borrower --- Contract enforcement --- Credit market --- Credit policies --- Credit subsidies --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Finance and Financial Sector Development --- Financial markets --- Government interventions --- International Bank --- International Economics & Trade --- International Trade --- International transactions --- Law and Development --- Liquidity --- Liquidity Crisis --- Loan --- Moral hazard --- Private Sector Development --- Trade credit --- Trade Finance --- Trade Law --- Transaction
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The paper discusses the reasons for supporting international trade finance during a liquidity crisis. Targeted interventions are justified when prices are rigid and sellers insist on immediate payment due to fears of strategic default. In this case, buyers who reject the seller's offer fail to internalize the seller's benefit from additional liquidity. A general infusion of credit will not facilitate the beneficial transaction, but an infusion targeted at the buyer's bank's trade finance supply will do so. Since there is a need for interventions in one country to benefit actors in another, international coordination is called for.
Access to Finance --- Asymmetric information --- Bank credit --- Borrower --- Contract enforcement --- Credit market --- Credit policies --- Credit subsidies --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Finance and Financial Sector Development --- Financial markets --- Government interventions --- International Bank --- International Economics & Trade --- International Trade --- International transactions --- Law and Development --- Liquidity --- Liquidity Crisis --- Loan --- Moral hazard --- Private Sector Development --- Trade credit --- Trade Finance --- Trade Law --- Transaction
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