Credit quality determinants of banks: how important are bankruptcy reforms?

Abstract

PurposeAlthough several microeconomic and macroeconomic factors driving banks' credit quality have been well-studied in the literature, one aspect which appears to have received limited attention is bankruptcy reforms. To address this issue, the author exploits data on Middle East and North Africa (MENA) country banks during the period 2010–2020 and examines the impact of bankruptcy laws on their credit quality.Design/methodology/approachIn view of the staggered nature of the implementation of legal reforms across countries, the author utilize a difference-in-differences specification to tease out the causal impact.FindingsThe findings reveal that bankruptcy reforms lead to a significant improvement in banks' credit quality. The impact is manifest mainly for conventional banks and driven by an increase in recovery intensity. The author also presents evidence which shows that such reforms exert positive real effects, although this impact differs across country characteristics.Originality/valueThe study is among the early ones for the MENA region to assess the interlinkage between bankruptcy reforms and banks' credit quality.