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Bank competition and collateral: theory and evidence

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Author Info
Hainz , Christa () (University of Munich)
Weill , Laurent () (Université Robert Schuman, Strasbourg)
Godlewski, Christophe () (University of Strasbourg)

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Abstract

We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 27/2008.

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Length: 37 pages
Date of creation: 02 Dec 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_027

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: collateral; bank competition; asymmetric information;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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