Financial Creditors Research Articles

Insolvency and Bankruptcy Code 2016: Impact on Markets and the Economy

This is the text of a keynote address given at a conference with the same title held in New Delhi on 16 December 2019. In the address, I suggest that the defining feature of the approach taken by the drafters of India's new Bankruptcy Code was their decision to treat creditors as presumptively entitled to determine how the assets of an insolvent corporate debtor should be deployed, and that this represented a radical break from the old law. I suggest that there are very good reasons to favour a creditor-centric approach, but take some issue with the particular way in which creditors exercise control rights under the Code. I contrast the model of indirect creditor control we observe under English law with the more direct model of creditor control used in the Code, and suggest that direct creditor control may make it more difficult (and therefore costlier) for a third party to acquire the debtor's business. In cases in which value would be most likely to be maximised by leaving the assets in the hands of the debtor, I suggest that the decision to entrust the decision on a reorganisation plan to financial creditors sitting in a single class is potentially problematic on a number of levels, and that aspects of the treatment of non-financial creditors and senior (secured) financial creditors could be revisited. I conclude that if there is any appetite for reforms of the kind that I suggest, there is very good reason to think they could be implemented: since the Code has entered into force, it has been amended in a number of sensible ways, and it is clear that lawmakers are making every effort to ensure that the new law maximises the value of an insolvent debtor's estate for the benefit of its creditors.

Otklanjanje nedostataka u indijskm kreditnim i stečajnim okvirima prilagođenim rešenjima iz angloameričke pravničke literature

The law governing credit transactions in India is compartmentalized and concomitantly poses difficulties to contractual parties and access to credit: the overall effect of this is already being felt owing to the country's low rank on the 'getting credit' indicator of the World Bank's Ease of Doing Business Report 2020. The Insolvency and Bankruptcy Code 2016 (Code), being almost a mirror-image of the English Insolvency Act 1986, has some inherent defects that are incompatible with the local conditions vis-à-vis access to credit and business rescue. Some of these defects arguably emanate from the Code's unfair categorization of creditors into the 'operational' and 'financial' types, and the ensuing confusion as was witnessed in the Supreme Court's Home Buyers' case in 2019. Strangely, financial creditors enjoy some Code-given preferential treatments over operational creditors including the right to constitute committees of creditors in voting and confirming business rescue plans. The insolvency resolution process of the Code is incompatible with the fact that over 90% of the companies doing business in India are SMEs and family-owned. The crushing financial weight of insolvency resolution processes is foreseen to gradually cannibalize these SMEs and cause a sharp rise in the unemployment rate. The article diagnoses a number of defects in the credit and insolvency systems of India, and proposes transplantable solutions from the English system, the U.S. Chapter 11, and Article 9 of the Uniform Commercial Code.

Corporate Insolvency Resolution Process Under IBC 2016

In the past insolvency resolution process included operations of simultaneous Acts. This was changed and several insolvency laws were consolidated resulting in a single law for insolvency and bankruptcy unlike any other previous laws, These include the Sick Industrial Companies Act, 1985, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, and the Companies Act, 2013. Due to this, some cases were there pending for years. This code is the unification of all these laws which help do a robust mechanism to revive a company if it had to see the fate of insolvency. This code provides genuine rehabilitation and restructuring of the company. The IBC process, like the Australian and UK administration procedures, is not a debtor in possession procedure. Instead, a third-party insolvency practitioner (the Resolution Professional) takes control of the corporate debtor and, within strict statutory time frames, formulates a restructuring plan that creditors need to approve. The IBC process gives substantial power to financial creditors, both domestic and foreign.

Home Buyers and Three Fold Protection Shield of Law

The Real Estate sector was largely unregulated. Earlier, home buyers who pooled all their resources and invested in property were being arm twisted by the builders and were being taken for a big ride. Delay in completion of construction was a common phenomenon. There was hardly any legal protection to a home buyer as he had to move civil courts for redressal of his grievances which involved heavy expenses and time. Thereafter, Consumer Protection Act, 1986 came to be enacted which provided him with some solace but the same was not inexpensive and speedy nor was it specific to the real estate sector. However, there is a complete change in the scenario. The law has been bolstered in favour of home buyers and now they could get a speedy justice. It has come in the form of series of measures of the Government like enactment of Real Estate (Regulation and Development), 2016, (RERA), Supreme Court's direction, in the case of Jaypee Infrastructure Ltd. allowing the representative of allottees of flats to be part of the Committee of Creditors under newly enacted Insolvency and Bankruptcy Code, 2016 and subsequent amendments to the Code including "Home Buyers" as Financial Creditors. The RERA is very stringent, provided safeguards to the buyer of home. The promoter/builder will be punished for violation of the provisions of the Act. It is clarified by the Supreme Court that a consumer could get his grievance redressed through any of the enactments, be it Consumer Protection Act, 1986, RERA, 2016 or Insolvency and Bankruptcy Code, 2016. The Home Buyer has three laws in his arsenal.

Insolvency and Bankruptcy Code, 2016 – Journey So Far: A Survey

It has been over two years since the Insolvency and Bankruptcy Code, 2016 was implemented in India. The Code has brought about a dramatic change in the manner in which the insolvency and bankruptcy proceedings in the country would be handled in a time bound manner. The Code is expected to resolve the non performing asset (NPA) crisis and the resultant slowdown in the availability of credit in the economy . An entirely new ecosystem has come into being as a result of which a host of opportunities have opened up for finance and legal professionals .Since the implementation of the code various applications initiating Corporate Insolvency Resolution Process ( CIRP) have been filed by the corporate debtors, the financial creditors and the operational creditors. The CIRP’s cases admitted, the number of resolution professionals registered , amount of recoveries made by the financial creditors in the cases resolved so far have been progressively increasing over the years whereas in certain cases the banks have had to take a sizeable haircut also. In order to understand the journey of the Insolvency and Bankruptcy Code, 2016 thus far a questionnaire based survey was carried out amongst the registered insolvency professionals in the country to ascertain their views on the various facets of the Code and the difficulties faced in it’s implementation. A structured questionnaire was framed with 18 research questions, these questions were close ended and were a combination of Dichotomous, Multiple choice and on Likert scale. The responses were codified and analyzed. The research paper presents this analysis along with the interpretations for the benefit of the readers.

Differential Treatment Among and Within Classes of Creditors Under the Insolvency and Bankruptcy Code, 2016: Issues and Suggestions

C. Scott Pryor and Dr. Risham Garg, have undertaken a multi-pronged project to understand certain aspects of the implementation of India’s new Insolvency and Bankruptcy Code, 2016 (“IBC”). Their efforts have included a questionnaire emailed to a large number of Resolution and Insolvency Processionals as well as interviews of Resolution Professionals, Insolvency Professionals, attorneys, representatives of several of the Insolvency Professional Agencies, and officials of the Insolvency and Bankruptcy Board of India. Pryor and Garg have identified several problematic developments as a result of their research that in turn have led them to three preliminary conclusions: 1. Vesting near-plenary control of the Corporate Resolution Insolvency Process (CIRP) with a Committee of Creditors composed of only financial creditors leads to a perception of inequitable distributions between the class of financial creditors and the class of operational creditors. 2. The CIRP provisions of the IBC may be inconsistent with public policy because they have been construed to fail to protect vested charges that secured creditors may have against the property or assets of the corporate debtor. 3. The CIRP provisions and accompanying regulations fall short of the standards of procedural fairness. In addition to conducting additional empirical research to test their preliminary conclusions, Pryor and Garg suggest that the CIRP Regulations be revised to provide that: (i) the any resolution plan provide for the value of the secured claims of holders of registered charges in assets of the corporate debtor; (ii) any resolution plan disclose the bases for the allocation of value within the class of financial creditors and between the classes of financial and operational creditors; and (iii) the Committee of Creditors provide reasons for any deviation from the norm of equitable distribution of any residual enterprise value among financial and operational creditors.

The Development of a Fuzzy Logic System in a Stochastic Environment with Normal Distribution Variables for Cash Flow Deficit Detection in Corporate Loan Policy

This paper develops a Mamdani fuzzy logic system (FLS) that has stochastic fuzzy input variables designed to identify cash-flow deficits in bank lending policies. These deficits do not cover the available cash-flow (CFA) resulting from the company's operating activity. Thus, due to these deficits, solutions must be identified to avoid companies' financial difficulties. The novelty of this paper lies in its using stochastic fuzzy variables, or those categories of variables that are defined by fuzzy sets, characterized by normally distributed density functions specific to random variables, and characterized by fuzzy membership functions. The variation intervals of the stochastic fuzzy variables allow identification of the probabilistic risk situations to which the company is exposed during the crediting period using the Mamdani-type fuzzy logic system. The mechanism of implementing the fuzzy logic system is based on two stages. The first is based on the determination of the cash-flow requirements resulting from loan reimbursement and interest rates. This stage has the role of determining the need for financial resources to cover the liabilities. The second stage is based on the identification of the stochastic fuzzy variables which have a role in influencing the cash flow deficits and the probability values estimation of these variables taking into account probability calculations. Based on these probabilistic values, using the Mamdani fuzzy logic system, estimations are computed for the available cash-flow (the output variable). The estimated values for CFA are then used to detect probability risk situations in which the company will not have enough resources to cover its liabilities to financial creditors. All the FLS calculations refer to future time periods. Testing and simulating the fuzzy controller confirms its functionality.

Efficient priority rules and the Indian IBC

India passed a comprehensive and new Insolvency and Bankruptcy Code (IBC) on May 28, 2016. Prior to this, institutional debt defaults were handled through a number of different laws and regulations, like SICA, 1985, Debt Recovery Act, 1993, SARFAESI, 2002 and Company Law, 2013. In addition, for companies above a certain size, the High Courts had to be involved, especially in winding up decisions. The IBC, being a uniform code, was meant to reallocate assets more efficiently and quickly. In this paper we develop a model that gives rise to credit rationing as a result of moral hazard and investigate the efficiency of three different possible priority rules: (a) when financial creditors have priority over operational creditors (b) when operational creditors have priority over financial creditors and (c) when both have equal priority. We argue that the extent of credit rationing is invariant under all three priority rules. We then show why a cost of business indicator that looks only at the price of inputs is flawed in determining efficiency.

Fixing creditor-debtors’ tensions through labor devaluation. Insights from the Spanish hotel market

This article aims to analyze how labor devaluation alleviates the post-crisis creditor-debtor tensions in Spanish hotels. It is argued that the disciplinary measures imposed by financial creditors to corporate debtors are increasingly being displaced towards labor. More broadly, the article makes the point that labor devaluation at the corporate level is not only pursued in order to increase corporate profits, but it mainly aims to improve the creditor-debtor relations.The arguments are exemplified by the case study one of largest Spanish hotel corporations, NH Hotels. The article finds that the eruption of the economic crisis in 2008 and the following lack of liquidity forced creditors (banks) to discipline hotel corporations such as NH Hotels. The paper finds that labor devaluation helped to enhance the economic performance of NH Hotels in three main ways. First, labor devaluation implied an ‘improvement’ of the corporation's image towards potential investors; second, it helped to improve the corporation’s economic performance ratios, and thirdly, it smooths the process of revaluing hotel assets. The article concludes that labor devaluation strategies have been fruitful to indebted corporations, as the creditor-debtor relations have improved with labor devaluation.

Start Your Engines: Are We Going to See More Creditor Recovery Efforts in Venezuela?

The past few weeks have seen a step-up in creditor efforts to pursue court judgments and judicial execution on the assets of Petroleos de Venezuela, S.A. (“PDVSA”). Within days of obtaining a $2 billion arbitral award against PDVSA and two subsidiaries, ConocoPhillips Co. initiated enforcement proceedings against PDVSA operating assets in the Netherlands Antilles, and initially obtained various court-ordered attachments there. In the United States, Crystallex should receive a decision by June 30, 2018 whether PDVSA is the alter ego of the Republic, possibly permitting it to enforce its $1.4 billion judgment against PDVSA’s assets in the United States. Further, at least one commercial creditor of PDVSA has reportedly been the first to sue in New York seeking a judgment on a defaulted promissory note, perhaps foreshadowing similar actions by holders of defaulted PDVSA and Republic bonds. This article first summarizes the magnitude of the claims against PDVSA and the Republic – both those that have been reduced to arbitral awards or judgments and are in various stages of enforcement proceedings, as well as the much larger pool of additional claims that are not (yet) in litigation but could become the subject of judicial proceedings. Next, we provide an update on the pending enforcement proceedings in the United States and elsewhere and the possible ramifications of those proceedings directly for the creditors involved and indirectly for those other PDVSA and Republic creditors watching from the sidelines. The third section provides a report on the status of litigation in Florida brought by a Trust purportedly formed on PDVSA’s behalf which is suing to recover billions of dollars in damages allegedly caused to PDVSA by a decade-long bid rigging and bribery scheme. Finally, the article discusses the implications of the litigation and political news of the last few weeks – including the purported re-election of Nicolas Maduro for another term and the possibility of escalating U.S. government sanctions – for Republic and PDVSA bondholders and other financial creditors who have not initiated any legal actions, but who may decide to do so in the near future.

Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

AbstractThe European Union Draft Directive on a Preventive Restructuring Framework and Second Chance (the ‘Draft Directive’) provides rules for adopting reorganisation plans in order to avoid insolvency. The Draft Directive also provides rules on the related problem of interim financing. According to the Draft Directive, interim financing should be encouraged and not be made subject to claw back unless parties have committed fraud or acted in bad faith. The Draft Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Draft Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing reducing the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross‐collateralisation and aggressive loan‐to‐own strategies under the guise of interim financing.There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Draft Directive into a fully fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Draft Directive to cases of new security against new money necessary and used for the continuation of the business. Copyright © 2018 The Authors International Insolvency Review published by INSOL International and John Wiley & Sons Ltd.

Update on PDVSA US Litigation Trust v. Lukoil Pan Americas, et al.

This is an update to the article we published on March 15, 2018 on the lawsuit filed by the PDVSA US Litigation Trust (the “Trust”) in federal court in Miami, Florida on behalf of Venezuela’s state-owned oil company, Petroleos de Venezuela, S.A. (“PDVSA”) against a group of 44 oil trading companies, banks and individuals, alleging that they participated in a 14-year scheme to rig bids, underpay on purchases and overcharge on sales, allegedly resulting in billions of dollars of losses to PDVSA. Our prior article flagged a number of interesting legal and factual questions raised by the suit, such as how the Trust was created, whether it has standing to assert PDVSA’s claims, whether some or all of the claims would be barred by applicable statutes of limitation and adequately assert an injury in the United States, and whether the Trust would be able to obtain the cooperation from PDVSA necessary to respond to discovery requests, among others. The case also may have implications for financial creditors of PDVSA, and even creditors of the Republic of Venezuela, who may be able to lay claim to the economic value of the Trust’s lawsuit or to any recovery, on the theory that the Trust is pursuing the claims for PDVSA’s sole benefit. The filings in the suit thus far provide insight into some, though certainly not all, of the questions raised by this suit and also introduce new issues of their own. Defendants are pursuing a vigorous challenge to the standing of the Trust to assert PDVSA’s claims under both Venezuelan and New York law, which the Court has agreed to hear as a preliminary issue. The agreement by which the Trust was formed has been filed with the Court and it reveals the role of the Venezuelan government in entering into the Trust agreement on PDVSA’s behalf and the economic interests of the Trust’s lawyers and other professionals versus those of the beneficiary of ultimate recoveries, PDVSA. The defendants’ opposition to the Trust’s motion for a preliminary injunction seeking a seizure of evidence and freeze of assets also has revealed defenses to the federal and state claims asserted in the complaint and confirmed that some of the issues we identified are already arising in the litigation.

PDVSA US Litigation Trust: What Creditors Should Know About the Trust, Its Claims and Its Implications for Venezuela's Restructuring

Last week, lawyers unsealed a complaint filed in federal court in Miami, Florida on behalf of Venezuela’s state-owned oil company, Petroleos de Venezuela, S.A. (“PDVSA”), against a group of 44 oil trading companies, banks and individuals. The suit alleges that the defendants participated in a 14-year scheme to rig bids, underpay on purchases and overcharge on sales, allegedly resulting in billions of dollars of losses to PDVSA. The lawsuit was brought by an entity called the PDVSA US Litigation Trust, which was formed for the purpose of pursuing potential claims by PDVSA, and to which PDVSA has reportedly assigned its litigation rights related to the alleged bribery scheme but retained the right to receive the net recovery the Trust obtains. The decision by PDVSA to pursue these claims in the United States at this time via a litigation trust raises a number of interesting legal and strategic issues not just for the defendants named in the suit, but also for PDVSA’s bondholders and other creditors. With respect to the litigation, there are questions as to whether the Trust has sufficient standing to be a claim, whether some or all of the claims will be barred by applicable statutes of limitation, and whether the Trust will be able to obtain the cooperation from PDVSA necessary to respond discovery requests. The case may also generate a reaction by financial creditors of PDVSA, who until now faced the prospect of pursuing claims to billions of dollars in defaulted PDVSA bonds without any known PDVSA assets in the United States, other than PDVSA’s indirect interest in CITGO Petroleum Corporation. Those creditors might now be able to lay claim to the economic value of the Trust’s lawsuit or to any recovery, on the theory that the Trust is pursuing the claims for PDVSA’s sole benefit and PDVSA has the right to receive any recovery assuming no impediment posed by any then-pending U.S. sanctions. The potential ability to attach the Trust’s recoveries may convince creditors to pursue actions against PDVSA in order to position themselves as the first beneficiaries of those recoveries, or may otherwise provide the proverbial “carrot” to offer creditors willing to restructure their claims as part of an eventual global restructuring of the debt of PDVSA, and possibly even the Republic.

How the capital structure of firms is determined over business cycles: further evidence from the construction industry of Taiwan

This paper uses the panel data regression model to study the Taiwanese construction industry during the period 1982–1995 because during this period, Taiwan’s gross domestic product shows a structural change in economic growth trends over three business cycles. This design allows us to examine whether the effects of firm characteristics and economic growth on capital structure vary with macroeconomic conditions and across periods with changing economic growth trends. First, the results show that the effect of macroeconomic conditions on capital structure is counter-cyclical. Second, the effects of firm characteristics on capital structure can vary with macroeconomic conditions, although firm characteristics do not have a direct effect on capital structure. Third, the effects of firm characteristics on capital structure can vary across periods with changing economic growth trends. Finally, economic growth does not have a direct effect on capital structure. However, the effect of economic growth on capital structure can vary with macroeconomic conditions and across periods with changing economic growth trends. The findings of this study can be a helpful reference for financial managers, creditors, investors and government policy-makers in emerging countries.

Opening the Door for Opportunistic Use of Interim Financing. Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

The draft of the EU Directive on Preventive Restructuring Frameworks and Second Chance (the Directive) provides rules for adopting reorganisation plans in order to avoid insolvency. The draft Directive also provides rules on the related problem of interim financing. According to the draft Directive, interim financing should be encouraged and not be made subject to clawback unless parties have committed fraud or acted in bad faith. The Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing which will reduce the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross-collateralisation and aggressive loan-to-own strategies under the guise of interim financing. There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Directive into a fully-fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Directive to cases of new security against new money necessary and used for the continuation of the business.

All's Well that Ends Well: Addressing End-of-Life Liabilities for Oil and Gas Wells

The recent downturn in energy prices has shone a spotlight on the issue of cleaning up inactive oil and gas wells. In Alberta, mounting insolvencies have caused the number of “orphaned” wells – i.e., without a financially accountable owner – to balloon from fewer than 100 to 3,200 in the past five years. With low energy prices, that list of wells risks growing longer. Of the roughly 450,000 wells registered in the province, approximately 155,000 are no longer producing but not yet fully remediated. These wells impose potential risks and costs not borne by those who benefited during the productive phase. These include the opportunity cost of taking up land that can’t be used for other purposes, risks to households from released gas and explosions, risks to the local environment from water and soil contamination, and broader risks due to leaking greenhouse gases. Moreover, the cost to clean up wells from no-longer-viable owners has the potential to spill over to surviving firms in the industry and, ultimately, citizens. In a stress test, we estimate the potential social cost of well liabilities to be as high as $8 billion. Alberta, along with other energy producing provinces in Canada, has a system in place to manage the risk of end-of-life well liability. However, a system that worked in the past is now strained under the weight of low prices. In addition, a recent court decision placing financial creditors in higher priority than environmental liabilities has further degraded the efficacy of current policies. This speaks to the need for reform. To its credit, the Alberta government is in the midst of consultations on reforming the province’s well liability policies. In this Commentary, we propose a two-part solution of partial bonding and mandated insurance for existing and new wells. First, we recommend the province introduce an upfront bonding requirement. However, this bonding requirement should be less than the full expected liability cost. This recognizes that society should accept some risk in exchange for greater economic activity, as well as aligning with the time profile of a well’s net asset value. Second, once a well enters the inactive phase, the province should require companies to hold insurance to cover the cost of cleaning up the well. In comparison to a strict time limit on inactive wells, an insurance requirement would allow firms to weigh the increased cost of holding unproductive wells against the potential value of returning them to production. We hope our recommendations are considered by the current Alberta review of end-of-life well policies, due to report by the end of 2017.

EFFECT OF ECONOMY PRICING STRATEGY ON THE PROFITABILITY OF INSURANCE FIRMS IN KENYA.

Purpose: The objectives of the study were to analyze effect of an IPO on the financial performance of listed companies in the Nairobi securities exchangeMethodology:The study will adopt an events study. The target of this study is companies that have issued IPOs and are listed in the Nairobi Securities Exchange.The sample will consist of companies that issued IPOs between 1996 and 2011.Our sample size is 13 listed companies in the NSE (Appendix II).The study will make use of secondary data.Market model will be used in coming up with Expected/Normal Return (R), Abnormal Return (AR), the Cumulative Abnormal Return (CAR) and then lastly, test for the significance of the study.Results:It was also possible to conclude that there was a positive but insignificant relationship between mean market return and PBT.It was psosoble to conlude that the mean abnormal retruns after the IPO were higher than before IPOIt was possible to conclude that going public allows the firm to enhance its bargaining power with bankers and financial creditors, and consequently reduces the firm’s cost of credit. It is also possible to conclude that selling shares to the public enhances a firm’s financial flexibility by generating additional sources of capital to finance growth and expansion and these is reflected by the high share prices. The study also concludes that increase in investor recognition and shareholder base due to an IPO lowers the firm’s cost of equity; enhances stock liquidity which is valuable for managerial incentive schemes, which inturn turn increases firm value. .Policy recommendation: The study recommends that the current efforts of listing small firms/SMEs should be fast tracked so as to facilitate the listing of small firms. It was recommended that the listed companies to go public as this enhances a firm’s financial flexibility by generating additional sources of capital to finance growth and expansion. This is reflected in their share prices.The study recommends that each county should have security exchange so that the private firms in the county can be listed. It was recommended that CMA should encourage firms to list as doing so would increases investor recognition and shareholder base which would lowers the firm’s cost of equity and improves frims value

Systemic Risk in Financial Markets: How Systemically Important are Insurers?

We study how insurers contribute to systemic risk in financial markets. Systemic risk is measured as the market value of distressed losses to financial institutions' creditors, and in terms of tail interdependence between individual financial institutions and the broader financial system. The global financial system is represented by a panel of 183 major banks and insurers over the pre-crisis and crisis periods from January 2005 to December 2014. On the sector level, we find that the insurance sector generally contributes very little to the aggregate amount of systemic risk in the global financial system; during the financial crisis and the European sovereign debt crisis, its systemic risk share averaged only 9 percent. On the level of individual institutions, however, several multi-line and life insurers appear as systemically risky as the riskiest banks. Our results indicate that insurers' level of systemic risk varies by line of insurance, and provide a preliminary affirmation that some insurers are systemically important financial institutions. We discuss several important implications for the regulation of systemic risk in financial markets.

Subsidizing Liquidity or Subsidizing Markets? Safe Harbors, Derivatives, and Finance

This paper ultimately seeks to promote a discussion that would have ideally been held before the safe harbors – defined as the provisions that allow market participants to ignore the core provisions of the Bankruptcy Code and other insolvency laws – were adopted by legislatures throughout the world. The recent financial crisis should be ample to revisit the discussion. In particular, I use this paper to push against the contention that because the safe harbors enhance liquidity in the derivatives market, that alone justifies the existence of the safe harbors.Liquidity is, in essence, “moneyness.” The safe harbors enhance the money-like qualities of one class of financial instruments by removing them from legal institutions that apply to most other classes of financial instruments. By doing so, the safe harbors convert swaps and other derivatives into a special class of contracts that are exempt from at least one area of non-contractual statutory law.I contend that granting these sort of exceptions is a zero sum game. By removing part of the costs of default from swaps, lawmakers have increased the costs that will be incurred by other financial instruments or other creditors, in other parts of the capital structure. That is, the holders of non-safe harbored financial instruments are subsidizing the safe harbored part of the capital structure. The core question is whether that subsidy – which we are told is vital to the very existence of the derivatives market – is worth more than its cost? The costs of the subsidy include any increase in the cost of other, non-safe harbored financial instruments, the costs to involuntary creditors who are unable to price the safe harbors at all, and the larger social costs of undermining legal institutions designed “to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.” By subsidizing liquidity for swaps, and thus facilitating the growth of the swaps market, we are incurring these costs. Is it worth it? My analysis herein suggests reason for doubt. We need to have the conversation.

Whose Voice, Whose Interests?

This paper looks at whose voice is heard and whose interests are protected in the making of finance-related laws in China. To ensure its accuracy, the paper focuses on a real-life case study of the making of bankruptcy laws in 1986 and 2006. Laws provide a set of incentives and constraints on their intended users and beneficiaries. In the context of bankruptcy law this means determining who shall bear the risk of corporate failure, whose interests shall be prioritized in corporate exit or reorganization, and who shall be the mediator/decision-maker in a case of conflict. Exploring bankruptcy law-making process in China sheds light on the interaction between and pressures exerted by the various stakeholders, which in turn informs the debate of representation and participation in China’s legislative process. While it is generally accepted that the key and dominant player is the Party-state whose representatives prepare, debate, vote on and promulgate the law, I propose that that is not a complete picture. The Party-state is subject to multiple internal influences and interests they wish to protect. These internal motives are influenced by certain powerful external users and stakeholders of the proposed law who try to protect their own interests. Although the Party-state is the ultimate law-maker, it allows deliberations and interjections by the interested parties. As a result, the interests and motivations of the two groups interact and affect each other leading to a compromise formulation of the new law. The discussion in this paper is informed by what we know about the passage of the 2006 bankruptcy law. The experience with making the older 1986 law will also be included where relevant. Thanks to the fundamentally opposed interests at play it took many years, numerous drafts and uniquely bumpy and disharmonious legislative run to reach an acceptable compromise each time which makes the bankruptcy law a perfect case study of the interests at play in corporate law-making in China and in transition from plan to market in general. The key clashes included ideology, the position and adequate protection of workers, the role and rights of financial creditors (as represented by the banks) and the admissibility of international pressure and experience. In other words, the key to passing the 1986 and 2006 laws was whether and to what extent should the ingrained demand for worker protection and social welfare provision be compromised to accommodate the need for further economic growth and how far to accommodate the demands of the increasingly powerful and independent financial creditors (i.e. mostly private companies and banks) and the international community. Although the paper focuses on bankruptcy law, the findings may be applicable to a variety of corporate finance-related laws since it uncovers the process and mechanisms used in law-making more broadly.