Congressional efforts to make it easier for consumers to shed debt in bankruptcy could cause lenders to restrict credit and raise prices, warns Federal Reserve Bank of Cleveland economist Stanley D. Longhofer.

Mr. Longhofer bases his conclusion on the response of lenders to the deterioration in the bankruptcy code's absolute priority rule, which states that creditors with the most senior claims get repaid in full before those with junior claims.

This rule has gradually eroded as debtors have learned to manipulate the bankruptcy system to force creditors to make concessions rather than receive full payment.

Using a series of statistical models, he finds that lenders increased prices and cut back on credit in response to the troubles with the absolute priority rules. He then concludes that lenders would further restrict credit and raise prices if Congress adopted changes proposed by the National Bankruptcy Review Commission. A revised version of the study will be published this summer in the Journal of Financial Intermediation.

For a copy of "Absolute Priority Rule Violations, Credit Rationing, and Efficiency," call 216-579-3079.

Banks must play an integral part in any electronic money system, George Washington University professor Elinor Harris Solomon concludes in a new book.

"Virtual Money" reviews the history of money and the development of the first electronic payment systems. Ms. Solomon finds that the nature of money is the same whether it is paper or electronic blips. Both depend on trust, a proven track record, and security. Only banks excel in all these categories, she said.

For a copy of "Virtual Money," visit a major bookstore or

Seeking to advance debate on the future of electronic payments, the American Bankers Association prepared a compendium of interviews with nine leading policymakers.

Federal Reserve Bank of Kansas City President Thomas M. Hoenig says he doesn't expect electronic money to gain much public support for at least another several years. "There is much more work to be done before you find it more convenient than using cash or credit cards," he explains. Comptroller of the Currency Eugene A. Ludwig says providers of smart cards need to adequately inform consumers of their liability of lost cards and discuss privacy issues. But he says the government must be careful not to overregulate.

Former Federal Deposit Insurance Corp. Chairman Ricki Helfer says she sees few safety-and-soundness issues involving smart cards and electronic money, provided consumers are aware of which products are not insured by the government.

For a copy of "Payment System Integrity," call 202-663-5454.

Banks will need less supervision in the next decade, writes Raghuram G. Rajan, an economist at the University of Chicago. Improvements in technology will let banks immediately settle payments made through clearing houses, substantially reducing the risk an institution will default. Also, clearing houses are requiring members to post collateral to guarantee payments, he notes.

"Once the payment system is immunized from any individual institution's risk of failure, it is less clear that depository institutions are special and should be supervised," he writes.

For a copy of "The Past and Future of Commercial Banking Viewed Through an Incomplete Contract Lens," call 216-579-3079.

Research Scan runs on the second and last Fridays of the month. (Because American Banker will not be published Nov. 28, the column is appearing today.) Submissions should be sent to American Banker, 1325 G St. NW, suite 900, Washington, D.C. 20005.

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