Banking Reforms, Credit Access, and Resolution of Financial Distress
54 Pages Posted: 14 Feb 2017 Last revised: 30 Sep 2019
Date Written: September 14, 2019
The removal of geographic restrictions on banking activities can provide credit to a larger population. Economic hardships, however, can force some of the borrowers to default on their loans and file for bankruptcy to overcome financial distress. Using data aggregated at the US county-level, we show that allowing an in-state bank to open branches anywhere within that state (intrastate branching) increases Chapter 13 filings (debt repayment from future income). An increase in mortgage supply after intrastate branching helps explain the rise in Chapter 13 filings, suggesting that homeowners file under Chapter 13 as an effort to save their houses. In contrast to the existing literature that is based on state-level data, the effect of interstate banking on Chapter 7 filings (debt repayment from asset liquidation) is insignificant.
Keywords: Law and Finance; Bank Deregulation; Mortgage Supply; Personal Bankruptcy; Household Finance
JEL Classification: G28; G21; D12; D14; K35
Suggested Citation: Suggested Citation