Working Paper: CEPR ID: DP4821
Authors: Koen Schoors; Konstantin Sonin
Abstract: Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights into the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomena in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.
Keywords: Arrears; Bad Loans; Bank Closure; Bankruptcy; Creditor Passivity
JEL Codes: G21; G28; G33; P50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Creditor passivity (G33) | stable nonenforcement equilibrium (passivity trap) (D50) |
| Enforcement by one creditor (G33) | expected proceeds of enforcement by others (K40) |
| Proportion of enforcing agents (P14) | enforcement value for individual creditors (G33) |
| Effective bankruptcy laws and government intervention (G28) | shift from low enforcement equilibrium to high enforcement equilibrium (P37) |
| Macroeconomic stabilization (E63) | exacerbation of creditor passivity (G33) |
| Liquidity shocks (E44) | act as catalysts for enforcement (K40) |
| Bank closures (G21) | introduction of enforcement into the economy (K40) |