HETEROGENEITY IN BANK VALUATION OF LDC DEBT - EVIDENCE FROM THE 1988 BRAZILIAN DEBT-REDUCTION PROGRAM

Using data on bank choices in the 1988 Brazilian debt-reduction deal, we confirm predictable heterogeneity in bank valuation of Brazilian cl aims. In the presence of a functioning secondary market for LDC debt, the source of this heterogeneity is unclear. We introduce a model in w hich regulatory concerns influence bank choice, Bank choices in debt r eduction programs are aimed at maximizing the magnitude of their trans fer from regulatory agencies. As a result, bank choices reflect their characteristics, including financial strength and exposure to the debt or country. The directions of influence correspond to the predictions of our model.