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collateral repossession. If creditors cannot recover the collateral pledged in case borrowers default, it is likely that the overall increase in credit risk that is faced in a recession is exacerbated by the fact that they will not even be able to recover the collateral. In such cases, the credit market overreacts to the exogenous shock and credit is strongly contracted. The model in Galindo and Micco (2001) provides a detailed explanation of the impact of creditor-protection rules and regulations on market breadth and the credit cycle.

3. Rules and Regulations Regarding Access to Collateral In order to test the validity of the previous discussion one needs a proper indication of how difficult it can be for a creditor to take over collateral. Recent papers by La Porta, Lopez-deSilanes, Shleifer and Vishny (1997 and 1998) have given new impetus to the empirical discussion on the importance of regulations regarding the rights of creditors over the assets of borrowers, by providing very valuable data on the state of creditor rights regulations around the world. The La Porta et al. (from here on LLSV) study collects information for 48 countries on regulations regarding creditor rights. Their sample roughly includes as many developed as developing countries. LLSV construct an index that summarizes regulations determining creditor rights to control collateral in case firms file for reorganization or bankruptcy. They study: i) if regulations impose an automatic stay on assets in case of reorganization; ii) if secured creditors have the right to be paid first in case of bankruptcy; iii) if regulations force firms to consult with creditors before filing for reorganization; and iv) if regulations force a removal of the firm’s management during reorganization. A positive response to each of the four elements of the index is interpreted as creditor rights protection. In short, these regulations provide an adequate picture of how regulation protects creditors. The LLSV study goes beyond collateral repossesion exclusively since it focuses on total asset liquidation in case of bankruptcy. In that sense, their discussion is even more general than that of the previous section. Recently, Galindo and Micco (2001) increased the coverage of the LLSV study to include most Latin American countries. Figure 3 shows the index for Latin American countries and provides information on OECD countries and on South East Asian countries extracted from the LLSV sample.

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creditor rights and the credit market: where do we stand?  

a recent survey has shown that the major problem faced by firms in latin american countries is difficulty in accessing financial markets. fi...

creditor rights and the credit market: where do we stand?  

a recent survey has shown that the major problem faced by firms in latin american countries is difficulty in accessing financial markets. fi...

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