Loan Restructuring: Financial Distress and Benefits

This lecture explores the different stages of borrower financial distress and default, emphasizing the potential benefits of loan restructuring for both lenders and borrowers. It presents examples where modifying loan terms can generate higher surplus for both parties, illustrating how reducing debt amounts or adjusting interest rates can lead to more favorable outcomes. The lecture also discusses various types of loan restructurings based on the severity of financial distress, highlighting the challenges and reasons why loan restructurings are not more common. Additionally, it delves into strategic borrower behavior and the impact of loan modifications on default rates, providing insights into the complexities of credit risk analysis, loan pricing, credit rationing, and relationship banking.