Creditor's Protection and Bank Loans: market power and bankruptcy reform's effects

This paper empirically investigates how market power in the credit market can change the magnitude of the effects of an increase in creditor protection on the interest rate and the spread of bank loans. To do so, we explore the improvement in the creditor protection produced by a new bankruptcy law approved in early 2005 in Brazil. Using monthly data on bank interest rates for corporate and consumer loans, we find that market concentration hampers 27.5% of the potential reducing effect of the law in the interest rate of new corporate credit operations. If we consider the average market concentration over all credit lines (treated and control groups), then the hampering effect represents 295 basis points, or 40.1%. Similar results are obtained when using Panzar and Rosse (1987) competition measure. The results show that an institutional reform that increases creditors protection has a positive effect on credit condition, but the concentration/competition structure of the market may diminish these effects considerably.