WHY IS BANK DEBT SENIOR - A THEORY OF ASYMMETRY AND CLAIM PRIORITY BASED ON INFLUENCE COSTS

This theory can explain why bank, debt is universally senior, consiste nt with the presence of conflict (lawyers) and absolute priority viola tions in financial distress: Better organized banks would more strongl y contest priority in financial distress if they were junior. Because ''deterrence'' can reduce creditors' total expenses in a priority cont est, the ex post stronger lobbyist/litigant should be senior ex ante. For equivalent reasons, the theory can advise when public debt should be senior to trade credit and/or implicit contracts, and can even sugg est one rationale for the absolute priority rule (APR). This article f urther shows that Chapter II creditor reimbursement procedures can low er overall costs.