Competing Creditor Claims and Banks’ Loan Loss Provisions: Evidence From Anti-Recharacterization Laws

The state-level adoption of anti-recharacterization laws (ARL) significantly increases the rights of secured creditors by denying judges’ discretion and allowing buyers of securitized assets to seize the collateral in bankruptcy. We find that banks operating in states that adopt ARL accrue for more loan loss provisions after the adoption. The effect is stronger for banks with higher exposure to the corporate loan market. These findings are consistent with banks competing more with other creditors for collaterals of corporate borrowers after the ARL adoption. In addition, we find that the effect of ARL on loan loss provisions is stronger for banks facing higher competition. Consistent with the competing creditor-claims hypothesis, we also show that the ARL adoption leads to higher future loan charge-offs and a lower growth rate in outstanding corporate loans.