Why Do Banks Ask for Collateral and Which Ones?
AbstractWe examine why banks resort to collateral, and whether their reasons vary according to the type of collateral. We use a unique dataset of bank loans granted to French distressed firms, which contains full information on the type and value of collaterals and the cause of firm default. Our work suggests that information asymmetries are not of prime importance in the decision of the bank to secure a loan, as no type of collateral helps to solve adverse selection and moral hazard problems. The reduction of the loan loss and the observed-risk hypothesis may however explain the use of collateral.
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Bibliographic InfoPaper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 06-07.
Date of creation: 2006
Date of revision:
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Collateral; Bank; Credit Risk.;
Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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