DP4821 Passive Creditors

Author(s): Koen Schoors, Konstantin Sonin
Publication Date: December 2004
Keyword(s): arrears, bad loans, bank closure, bankruptcy, creditor passivity
JEL(s): G21, G28, G33, P50
Programme Areas: Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4821

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.