The Problem of Debt Overhang and the Potential of Personal Insolvency Law Towards a Justiciable Jubilee? Dr. Joseph Spooner LSE Law Department
Policy case for household debt relief is becoming increasingly clear how do we give effect to such policies (through law)? 2 Problem #1: Legislating around the edges Problem #2: Absence of personal insolvency law from debt overhang policy discussions Problem #3: Absence of debt overhang issue from personal insolvency policy discussions Potential of personal insolvency law to address debt overhang problem Limitations of personal insolvency law and challenges in addressing debt overhang Conclusions and potential reforms Dr J Spooner, LSE Law, CfRC Conference 2017
Case for household debt relief Debt and Inequality Harshness of Debt and economic stagnation: Debt overhang and negative economic consequences of debt s uneven distribution of losses (Mian and Sufi 2014) IMF 2016 How to give effect to these policies? The (unfulfilled) potential of personal insolvency law
4 Problem #1: Legislating around the edges Household debt policy in the crisis and recession Low interest rates Forbearance Mortgage debt support schemes Future crisis prevention (e.g. Mortgage Market Review, consumer credit regulatory reforms) Prudential regulatory measures
Problem #2: Personal insolvency missing from public policy discussions 5 The debt overhang problem and the case for household debt relief: IMF 2012, 2016 World Bank 2013 Mian and Sufi 2014, Turner 2015 Bank of England staff 2014, 2016
Problem #2: Personal insolvency missing from public policy discussions of debt overhang IMF 2012 (+ Laeven & Laryea 2009, Andritzky 2014) Household debt restructuring programmes Mian and Sufi 2014 Mortgage debt cram-down in bankruptcy Turner 2015 Monetary policy: helicopter money Bank of England staff 2014, 2016 Monetary policy Ex ante credit regulation (lending rules) 6
% IVAs ongoing for specified number of years IVA Contracting Failures 7 35 % IVAs ongoing by number of years since commencement 30 25 20 15 10 5 0 6 7 8 9 10 Data as at May 2010 Data as at Sept 2012 Data as at September 2013 Data as at September 2014
Mortgages in Arrears Mortgages in Arrears 90 days+ Mortgages Restructured Total Personal Insolvencies DSAs + PIAs DRNs Bankruptcies 0 20000 40000 60000 80000 100000 120000 Government Predictions 2014 # 2015 # Irish Parl Committee Hearing: [Bank of Ireland]: What we said is that, in respect of debt forgiveness, writing down debt on properties is not something we do.
Problem #2: Personal insolvency missing from public policy discussions 10 Resolution Foundation 2014: the UK s insolvency regime is held up as being at the forefront of international practice. Dr Gertjan Vlieghe (Bank of England) 2016: No economy-wide tools available for large-scale debt restructuring across many borrower categories Contrast with: Mian and Sufi 2014, 2017: Debt contract design Mortgage debt cramdown through bankruptcy
Problem #3: Debt overhang issue missing from personal insolvency policy discussions 11 UK Insolvency Service 2014-15: Slight expansion of DRO entry criteria Online bankruptcy applications Increase in creditor petition threshold Lack of responsiveness to vanishing bankruptcies International organisations: Personal insolvency law as a solution to banking crisis (problem of Non-Performing Loans (NPLs)) European Investment Bank IMF European Commission
140000 Personal Insolvencies, England and Wales, 2001-2016 12 120000 100000 80000 60000 40000 20000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bankruptcies: EW IVAs: EW DROs: EW Total: EW
International Organisation views on NPLs e.g. European Investment Bank (2014) Legal and regulatory impediments are slowing down NPL resolution in many countries. (e.g. foreclosure protection) better quality of some of the institutional factors is associated with a lower fraction of NPLs. (where better quality = higher recovery rate on insolvent investments ) Insolvency law alongside: Targeted NPL resolution (incl. bad banks etc.) Developing market for NPLs
Potential of Personal Insolvency Law A solution when all policy levers appear to be blocked? Overcoming limitations of ex ante contractual solutions (e.g. Mian and Sufi, Shiller) Principle of debt discharge: acceptance of debt write-down Institutional (and political) factors Overcoming objections to household debt forgiveness Moral hazard
Challenges for Personal Insolvency Law Insolvency law Protection of debtor net wealth, rather than income Mortgage debt Commitment to debt relief as core aim of personal insolvency law Abandoning creditors bargain model of insolvency law Targeting of irresponsible lending?
First Steps? Reduce barriers to accessing debt relief (cost, entry criteria) Single Portal Prioritise the elimination of debt Remove objective of maximising returns to creditors Question adherence to contractual model (e.g. IVAs, DMPs) Taking debt discharge seriously