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Collateral and competition

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  • Mitchell Berlin
  • Alexander Butler

Abstract

The authors examine the effects of changes in competitive conditions on the structure of loan contracts. In particular, they present conditions in which greater loan market competition reduces the stringency of contractual collateral requirements, a prediction that is consistent with anecdotal evidence from loan markets. The authors also analyze the interaction between the degree of competition and the efficiency of contractual renegotiation. Insufficiently competitive markets may lead to bargaining difficulties that reduce the efficiency of renegotiable contracts. At low levels of competition negotiable contracts remain feasible only if collateral levels are inefficiently low.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 02-22.

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Date of creation: 2002
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Handle: RePEc:fip:fedpwp:02-22

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Keywords: Competition;

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References

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  1. Robert Hauswald & Robert Marquez, 2003. "Information Technology and Financial Services Competition," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(3), pages 921-948, July.
  2. Stanley D. Longhofer & João A. C. Santos, 1999. "The importance of bank seniority for relationship lending," Proceedings, Federal Reserve Bank of Chicago 620, Federal Reserve Bank of Chicago.
  3. Mitchell Berlin & Loretta J. Mester, 1992. "Debt covenants and renegotiation," Working Papers, Federal Reserve Bank of Philadelphia 92-9, Federal Reserve Bank of Philadelphia.
  4. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552 Elsevier.
  5. Ramon Caminal & Carmen Matutes, 2002. "Can competition in the credit market be excessive?," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 527.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(2), pages 407-43, May.
  7. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
  8. Shouyong Shi & Melanie Cao, 1999. "Screening, Bidding, and the Loan Market Tightness," Working Papers, Queen's University, Department of Economics 989, Queen's University, Department of Economics.
  9. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 429-52, March.
  10. Manove, Michael & Padilla, Atilano Jorge & Pagano, Marco, 2000. "Collateral Vs. Project Screening: A Model Of Lazy Banks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2439, C.E.P.R. Discussion Papers.
  11. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1367-400, September.
  12. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 11(2), pages 161-169, April.
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Citations

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Cited by:
  1. Dell''Ariccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5095, C.E.P.R. Discussion Papers.
  2. Hainz , Christa & Weill , Laurent & Godlewski, Christophe, 2008. "Bank competition and collateral: theory and evidence," Research Discussion Papers, Bank of Finland 27/2008, Bank of Finland.
  3. Luis Araujo & Raoul Minetti, 2012. "Credit Crunches, Asset Prices and Technological Change," Working Papers CASMEF, Dipartimento di Economia e Finanza, LUISS Guido Carli 1204, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  4. Elmas Yaldiz Hanedar & Eleonora Broccardo & Flavio Bazzana, 2012. "Collateral Requirements of SMEs:The Evidence from Less–Developed Countries," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance), Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi" 12111, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  5. Degryse, H.A. & Ongena, S., 2006. "The Impact of Competition on Bank Orientation," Discussion Paper, Tilburg University, Center for Economic Research 2006-68, Tilburg University, Center for Economic Research.
  6. Yaldız Hanedar, Elmas & Broccardo, Eleonora & Bazzana, Flavio, 2014. "Collateral requirements of SMEs: The evidence from less-developed countries," Journal of Banking & Finance, Elsevier, Elsevier, vol. 38(C), pages 106-121.
  7. Hainz, Christa, 2008. "Bank Competition - When is it Good?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 244, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. Hainz, Christa, 2007. "The Effect of Bank Competition on the Bank's Incentive to Collateralize," Discussion Papers in Economics, University of Munich, Department of Economics 2007, University of Munich, Department of Economics.

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