Speed for Safety: The Establishment of Bankruptcy Courts and Bank Credit Risk in China

Abstract

Abstract We investigate the effect of bankruptcy court establishment on the credit risk of municipal commercial banks in China from 2013 to 2020. Establishing bankruptcy courts reduces the non-performing loan ratio of municipal commercial banks. The effect is more pronounced in cities with low fiscal transparency and market fragmentation, and a strong rule of law. Furthermore, we argue that the bank’s loan provision and provision coverage ratio is the crucial intermediate variable in the relationship between bankruptcy court establishment and credit risk management. Our findings demonstrate the critical role of judicial system reform in promoting financial stability in China. JEL classification numbers: G21, G32, G33. Keywords: Bankruptcy court, Credit risk, Judicial reform.