Overview of Insolvency and Debt Restructuring Reforms in Response to the COVID-19 Pandemic and Past Financial Crises : Lessons for Emerging Markets

This note is part of the series of COVID-19 Notes developed by the World Bank Group's Equitable Growth, Finance and Institutions (EFI) team. By highlighting concrete examples of insolvency and debt restructuring reforms undertaken in response to the COVID-19 pandemic as well as past crises, this note highlights the importance of sound insolvency and debt restructuring regimes which are lacking in many emerging markets. Countries with under-developed or nascent insolvency frameworks should consider prioritizing the reforms covered in this note to improve their readiness to deal with a spike in business insolvencies. The note reviews insolvency and debt restructuring reforms aimed at addressing the economic effects of the COVID-19 crisis during two stages: the crisis containment stage and the crisis recovery stage. Crisis containment includes short-term insolvency law reforms adopted at the beginning of the COVID-19 outbreak to prevent businesses from being systematically pushed into insolvency. The objective of the reforms implemented during this stage was to 'flatten the curve' of insolvency cases and reduce the burden on institutions. Crisis recovery, the second stage, assesses actions taken by some countries during the COVID-19 crisis as well as during previous financial crises to address the medium-to-long term challenges of high levels of firm distress. The objectives of these second-stage reforms are generally to strengthen the institutional capacity and overall functioning of a country's insolvency regime and to prevent a potential systemic banking crisis caused by elevated levels of non-performing loans