Creditor Rights and Bank Competition

Dimas Fazio and Thiago Silva ()

No 569, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper examines if and how creditor rights reforms affect banking market competition. By decreasing the expected loss given default of creditors, policies aimed at improving creditor protection may also change the banking market structure. We study a Brazilian bankruptcy reform in 2005 that improved the recoverability of secured creditors in bankruptcy proceedings. We find that local banking concentration decreases in Brazilian municipalities that were more affected by the reform. This result is explained by non-leader banks gaining market share over local leader banks due to the reform. These results are robust to controlling for financial constraints variables. Furthermore, consistent with stronger collateral value reducing information asymmetry, more opaque firms benefit the most from the reform. Overall, our results highlight the role of creditor rights reforms in breaking the information monopoly of incumbent banks.

Date: 2022-09
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