Financial Stability Review
Business & Household Finance Articles
1999
Corporate
Workouts, the London Approach and Financial Stability
(134k)
(Issue 7, November 1999)
Episodes of incipient or actual financial instability are often accompanied by problems in the corporate sector, which may in turn give rise to more widespread losses in the financial system. But company failures sometimes occur because a company is unable to resolve temporary liquidity or other financial difficulties, even though the company's longer-term viability and solvency appear sound. This may reflect a co-ordination failure between creditors, arising from asymmetric information about the company's prospects or relative creditor priority. To the extent that this results in the unnecessary liquidation of viable companies, it represents a market failure that could cause or amplify financial instability. In particular, severe creditor losses associated with liquidation may cause further liquidations, which, to the extent that creditors are in the financial sector, may damage financial institutions. Unnecessary liquidation also represents a welfare cost in the form of unemployment and misallocation of capital. This article considers the extent to which non-statutory corporate restructurings at the pre-insolvency stage can reduce or mitigate these risks.
Key Resources
|
Memorandum of Understanding between HM Treasury,
the Bank of England and the Financial Services Authority
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