Magazine article American Banker

Easing Bankruptcy Law Would Tighten Credit

Magazine article American Banker

Easing Bankruptcy Law Would Tighten Credit

Article excerpt

Congressional efforts to make it easier for consumers to shed debt in bankruptcy could cause lenders to restrict credit and raise prices, warns Federal Reserve Bank of Cleveland economist Stanley D. Longhofer.

Mr. Longhofer bases his conclusion on the response of lenders to the deterioration in the bankruptcy code's absolute priority rule, which states that creditors with the most senior claims get repaid in full before those with junior claims.

This rule has gradually eroded as debtors have learned to manipulate the bankruptcy system to force creditors to make concessions rather than receive full payment.

Using a series of statistical models, he finds that lenders increased prices and cut back on credit in response to the troubles with the absolute priority rules. He then concludes that lenders would further restrict credit and raise prices if Congress adopted changes proposed by the National Bankruptcy Review Commission. A revised version of the study will be published this summer in the Journal of Financial Intermediation.

For a copy of "Absolute Priority Rule Violations, Credit Rationing, and Efficiency," call 216-579-3079.

Banks must play an integral part in any electronic money system, George Washington University professor Elinor Harris Solomon concludes in a new book.

"Virtual Money" reviews the history of money and the development of the first electronic payment systems. Ms. Solomon finds that the nature of money is the same whether it is paper or electronic blips. Both depend on trust, a proven track record, and security. Only banks excel in all these categories, she said.

For a copy of "Virtual Money," visit a major bookstore or

Seeking to advance debate on the future of electronic payments, the American Bankers Association prepared a compendium of interviews with nine leading policymakers. …

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