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Collateral and repeated lending

Author

Listed:
  • 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.

Suggested Citation

  • Artashes Karapetyan & Bogdan Stacescu, 2012. "Collateral and repeated lending," Working Paper 2012/18, Norges Bank.
    • Handle: RePEc:bno:worpap:2012_18
    as

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    File URL: https://www.norges-bank.no/en/news-events/news-publications/Papers/Working-Papers/2012/WP-201218/
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    References listed on IDEAS

    as
    1. Ongena, Steven & Smith, David C., 2001. "The duration of bank relationships," Journal of Financial Economics, Elsevier, vol. 61(3), pages 449-475, September.
    2. Igawa, Kazuhiro & Kanatas, George, 1990. "Asymmetric Information, Collateral, and Moral Hazard," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 469-490, December.
    3. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
    4. Leeth, John D. & Scott, Jonathan A., 1989. "The Incidence of Secured Debt: Evidence from the Small Business Community," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(3), pages 379-394, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Collateral; Screening; Bank relationships;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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