Does regulatory forbearance matter for bank stability? Evidence from creditors' perspective

Ahamed, M Mostak and Mallick, Sushanta (2017) Does regulatory forbearance matter for bank stability? Evidence from creditors' perspective. Journal of Financial Stability, 28. pp. 163-180. ISSN 1572-3089

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Regulatory forbearance in times of corporate distress has been a common practice in many countries to achieve bank stability, particularly so in the absence of a unified bankruptcy code, yet very little is known in the context of emerging market economies. Exploiting variation of membership across banks in a corporate debt restructuring programme (CDR) sponsored by the central bank in India, this paper finds that the banks that made use of regulatory forbearance (RF) on the restructured corporate loans could increase their stability significantly due to the extension of low provisioning on restructured loans. However, the positive effect of RF diminishes at higher levels of market power, highlighting that member banks with higher market power tend to originate riskier assets (as reflected in their risk-weighted assets) under the auspices of this programme. Our results remain robust to different estimators (including propensity score matching), ownership structure, and alternative measures of bank stability.

Item Type: Article
Schools and Departments: University of Sussex Business School > Economics
Subjects: H Social Sciences > HG Finance > HG4001 Finance management. Business finance. Corporation finance
Depositing User: M. Mostak Ahamed
Date Deposited: 04 Oct 2017 08:35
Last Modified: 02 Jul 2019 16:31

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