We use a unique data set to study how U.K. banks deal with financially distressed small and medium-sized companies under a 'contractualist' bankruptcy system. Unlike in the U.S., these procedures limit the discretion of courts to strict enforcement of debt contracts, without any dilution of creditors' claims. We show that lenders and borrowers select a debt structure that avoids some of the market failures often attributed to a contractualist system. Collateral and liquidation rights are highly concentrated in the hands of the main bank, giving it a dominant position in restructuring or liquidating a defaulting firm. There is little litigation, and no evidence of co-ordination failures or creditors' runs. However, there is some evidence that the bank's dominance makes it 'lazy' in monitoring, relying heavily on the value of its collateral in timing the bankruptcy decision.

No abstract

for helpful suggestions. We are grateful to Zhangkai Huang for excellent research assistance and we thank the Peter Moores Foundation for financial support.

No abstract

No abstract

This paper describes a feedback effect between real and financial development. The paper presents a new variable, which we call the cost of financial intermediation, through which the feedback between finance and growth operates. The theoretical part of the paper describes how specialization of financial intermediaries leads to such a feedback effect. The main result of this feedback is that differences in productivity across countries are amplified by financial intermediation. The empirical part of the paper uses U.S. cross-state data from banks' income statements to measure the cost of financial intermediation and to provide evidence for the feedback effect between finance and growth.

Bankruptcy law, Business cycles, Financial distress, Liquidation, E32, E44, G33,

No abstract