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.
court, Credit risk, Judicial reform.