Banking

Bankruptcy And The Collateral Channel

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Executive Summary

The authors propose and analyze a collateral channel in which a firm's bankruptcy reduces collateral values of other industry participants, thereby increasing the cost of external debt finance industry wide. To identify this collateral channel, they use a novel dataset of secured debt tranches issued by U.S. airlines which includes a detailed description of the underlying assets serving as collateral. The estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. They discuss how the collateral channel may lead to contagion effects which amplify the business cycle during industry downturns.

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