Personal Bankruptcy, Bank Portfolio Choice and the Macroeconomy

No 44, Bank of Lithuania Working Paper Series from Bank of Lithuania

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.

Keywords: Personal bankruptcy; household debt; housing; general equilibrium; bank portfolio choice (search for similar items in EconPapers)
JEL-codes: E44 G11 G21 K35 R21 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-04-24
New Economics Papers: this item is included in nep-ban, nep-dge, nep-law, nep-mac and nep-rmg
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