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Personal Bankruptcy, Bank Portfolio Choice and the Macroeconomy

Author

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  • Egle Jakucionyte

    (Tinbergen Institute and the University of Amsterdam, the Netherlands)

Abstract

This paper explores the spillover effects from increasing personal bankruptcy protection. Innovatively, the paper shows that the spillover effects can be influenced by the bank portfolio choice. Since a low level of personal bankruptcy protection keeps an insolvent individual liable until her debt is repaid in full, lender's returns on mortgages are less uncertain than returns on other assets ceteris paribus. Risk-averse banks would prefer mortgages over other types of assets such as corporate loans. Corporate lending and thus equilibrium output would fall. In contrary to the popular view that creditor protection smooths credit provision and makes the allocation of resources more efficient, I show that in some cases a low level of personal bankruptcy protection can lead to aggregate consumption losses. Also I show that macroprudential policies (LTV ratios) can successfully complement higher personal bankruptcy protection in ensuring even higher welfare.

Suggested Citation

  • Egle Jakucionyte, 2017. "Personal Bankruptcy, Bank Portfolio Choice and the Macroeconomy," Bank of Lithuania Working Paper Series 44, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:44
    as

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    References listed on IDEAS

    as
    1. International Monetary Fund, 2010. "The Credit Boom in the EU New Member States: Bad Luck or Bad Policies?," IMF Working Papers 2010/130, International Monetary Fund.
    2. Dean Corbae & Erwan Quintin, 2015. "Leverage and the Foreclosure Crisis," Journal of Political Economy, University of Chicago Press, vol. 123(1), pages 1-65.
    3. Chatterjee, Satyajit & Gordon, Grey, 2012. "Dealing with consumer default: Bankruptcy vs garnishment," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 1-16.
    4. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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