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Collateralization, Bank Loan Rates, and Monitoring

Author

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  • GERALDO CERQUEIRO
  • STEVEN ONGENA
  • KASPER ROSZBACH

Abstract

We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique data set from a large bank containing timely assessments of collateral values, we find that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims. We thus explain why banks are senior lenders and quantify the value of claimant priority.

Suggested Citation

  • Geraldo Cerqueiro & Steven Ongena & Kasper Roszbach, 2016. "Collateralization, Bank Loan Rates, and Monitoring," Journal of Finance, American Finance Association, vol. 71(3), pages 1295-1322, June.
    • Handle: RePEc:bla:jfinan:v:71:y:2016:i:3:p:1295-1322
    DOI: 10.1111/jofi.12214
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