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SME Collateral: risky borrowers or risky behaviour?

Author

Listed:
  • Carroll, James

    (Trinity College Dublin)

  • McCann, Fergal

    (Central Bank of Ireland)

Abstract

We explore two motives in a bank’s use of collateral: an ex-ante stock-of-risk effect, whereby banks secure observably riskier loans to reduce future losses; an ex-post flow-of-risk effect, whereby banks use collateral to lower the probability of reduced borrower effort. Using loan-level data on Irish enterprise lending, we explore these two mechanisms. We confirm the stock-of-risk hypothesis while finding no evidence that collateral reduces the ex-post flow-of-risk. We also highlight the importance of loan size by showing that banks secure almost all loans in the top quintile of loan size regardless of risk rating, whereas among smaller loans, collateralisation is higher for riskier loans.

Suggested Citation

  • Carroll, James & McCann, Fergal, 2017. "SME Collateral: risky borrowers or risky behaviour?," Research Technical Papers 06/RT/17, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:06/rt/17
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/06rt17---sme-collateral-risk-borrowers-or-risky-behaviour.pdf?sfvrsn=6
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    Cited by:

    1. Lawless, Martina & O’Toole, Conor & Slaymaker, Rachel, 2018. "Estimating an SME investment gap and the contribution of financing frictions," Papers WP589, Economic and Social Research Institute (ESRI).

    More about this item

    Keywords

    SME; Collateral; Risk; Moral Hazard;
    All these keywords.

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