The law needs to distinguish between borrowers who choose not to repay and

The law needs to distinguish between borrowers who

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not pay. The law needs to distinguish between borrowers who choose not to repay and those who are unable to meet their obligations in a timely manner. Similarly, the law should provide punishment for those who engage in criminal wrongdoing at the expense of a bank. This should occur regardless of whether the perpetrators are outsiders or the owners and managers of the bank. A legal system that is consistent with modern day bank lending activities is one that recognizes property rights and the role of collateral as security for a loan. The law should recognize the rights of the creditor to seek redress against a borrower who defaults on a loan. This redress should allow judgments to be awarded against the assets of the borrower. In the case of collateralized loans, the bank should be allowed to directly take title to the collateral after the borrower been in default for some relatively short period of time. Collateralized lending frequently entails lower costs to the borrower because the lender is presumed to assume lower risk because the collateral is available to cover all or part of the loan balance if the borrower does not pay. However, in some crisis countries, banks were not able to take title to collateral without the consent of the borrower. Legal reform should assure that liens can be perfected on collateral and that they can be executed, without an excessively burdensome process, should the borrower default. Once a bank has title to property that was pledged as collateral or obtained by executing a judgment against a borrower, the banks property rights should be recognized, including the right of the bank to sell the property. In the case of corporate loans the law should encourage debt restructuring by allowing banks all of the powers that nonbank firms have to negotiate and restructure debt. Specifically, banks should be allowed to take equity positions in companies where such positions result from “debt previously contracted.” In this way banks can still be barred from investing in commercial firms but be allowed to restructure corporate debt in a manner that both will maximize the recoveries of the bank and assure the continued economic viability of the firm. To provide a deterrent to wrongdoing at the expense of banks, the law should provide criminal penalties for a whole range of white-collar crimes. In particular, the law should provide sanctions in the event that the owners and managers of a bank use its assets for their own benefit at the expense of the viability of the bank. Bank directors and officers should be able to be sued civilly in the event a bank fails and it can be shown that they were negligent in carrying out their responsibilities. It should be recognized that the legal definition of negligence is not synonymous with bad judgment. These legal changes will both deter wrongdoing and increase accountability by those responsible for the management of banks.
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