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Speed for Safety: The Establishment of Bankruptcy Courts and Bank Credit Risk in China

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  • Yue Zhang

Abstract

We investigate the effect of bankruptcy court establishment on the credit risk of municipal commercial banks in China from 2013 to 2020. Establishing bankruptcy courts reduces the non-performing loan ratio of municipal commercial banks. The effect is more pronounced in cities with low fiscal transparency and market fragmentation, and a strong rule of law. Furthermore, we argue that the bank’s loan provision and provision coverage ratio is the crucial intermediate variable in the relationship between bankruptcy court establishment and credit risk management. Our findings demonstrate the critical role of judicial system reform in promoting financial stability in China.  JEL classification numbers: G21, G32, G33.

Suggested Citation

  • Yue Zhang, 2023. "Speed for Safety: The Establishment of Bankruptcy Courts and Bank Credit Risk in China," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(6), pages 1-2.
    • Handle: RePEc:spt:apfiba:v:13:y:2023:i:6:f:13_6_2
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    References listed on IDEAS

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    1. Bo Li & Jacopo Ponticelli, 2022. "Going Bankrupt in China [The politics of foreclosures]," Review of Finance, European Finance Association, vol. 26(3), pages 449-486.
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    6. Matthieu Chemin, 2012. "Does Court Speed Shape Economic Activity? Evidence from a Court Reform in India," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(3), pages 460-485, August.
    7. Araujo, Aloisio P. & Ferreira, Rafael V.X. & Funchal, Bruno, 2012. "The Brazilian bankruptcy law experience," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 994-1004.
    8. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
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    Cited by:

    1. Rehman, Obaid Ur & Zhou, Zihan & Wu, Kai & Li, Wen, 2024. "From courtrooms to corporations: The effect of bankruptcy court establishment on firm acquisitions," Finance Research Letters, Elsevier, vol. 61(C).
    2. Lin, Chuanlin & Zhan, Shiyuan, 2024. "Does the establishment of bankruptcy courts affect the risk of corporate collapse?," International Review of Financial Analysis, Elsevier, vol. 96(PB).

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    More about this item

    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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