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Collateral and repeated lending

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Author Info

  • Artashes Karapetyan

    ()
    (Norges Bank (Central Bank of Norway))

  • Bogdan Stacescu

    ()
    (BI Norwegian Business School,)

Abstract

Lending is often associated with significant asymmetric information issues between suppliers of funds and their potential borrowers. Banks can screen their borrowers, or can require them to post collateral in order to select creditworthy projects. We find that the potential for longer-term relationships increases banks' preference for screening. This is because posting collateral only provides the information that the current project of a given borrower is of good quality, whereas screening provides information that can be used in evaluating future projects as well as the current ones.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2012/WP-201218/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2012/18.

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Length: 26 pages
Date of creation: 18 Dec 2012
Date of revision:
Handle: RePEc:bno:worpap:2012_18

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Related research

Keywords: Collateral; Screening; Bank relationships;

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