Bankruptcy Priority for Bank Deposits: a Contract Theoretic Explanation
AbstractOver the past decade several countries, including the US, have introduced or redesigned legislation that confers priority in bankruptcy upon all or some bank deposits. We argue that in the presence of contracting costs such rules can increase efficiency. We first show in a private information model that a borrower can reduce overall costs of finance by letting informationally heterogeneous lenders choose between junior and senior debt. In particular, we find that debt priorities reduce socially wasteful information gathering by investors. We then argue why, particularly in banking, legal standardization of debt priorities may be superior to bilateral private arrangements.
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Bibliographic InfoPaper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 00.01.
Length: 51 pages
Date of creation: Nov 1999
Date of revision:
Publication status: Forthcoming in Review of Financial Studies.
Contact details of provider:
Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee
Phone: ++41 (0)31 780 31 31
Fax: ++41 (0)31 780 31 00
Web page: http://www.szgerzensee.ch/
Postal: Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee
Other versions of this item:
- Birchler, Urs W, 2000. "Bankruptcy Priority for Bank Deposits: A Contract Theoretic Explanation," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 813-40.
- NEP-ALL-2000-08-26 (All new papers)
- NEP-CFN-2000-08-26 (Corporate Finance)
- NEP-LAW-2000-08-26 (Law & Economics)
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