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Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment

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  • Cerqueiro, Geraldo

    ()
    (Universidade Católica Portuguesa)

  • Ongena, Steven

    ()
    (CentER - Tilburg University and CEPR, Department of Finance)

  • Roszbach, Kasper

    ()
    (Research Department, Central Bank of Sweden)

Abstract

We study a change in the Swedish law that exogenously reduced the value of all outstanding company mortgages, i.e., a type of collateral that is comparable to the floating lien. We explore this natural experiment to identify how collateral determines borrower quality, loan terms, access to credit and bank monitoring of business term loans. Using a differences-in-differences approach, we find that following the change in the law and the loss in collateral value borrowers pay a higher interest rate on their loans, receive a worse quality assessment by their bank, and experience a substantial reduction in the supply of credit by their bank. The reduction in collateral value also precedes a decrease in bank monitoring intensity and frequency of both the collateral and the borrower, consistent with models in which the pledging of risky assets incentivizes banks to monitor.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 257.

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Length: 41 pages
Date of creation: 01 Feb 2012
Date of revision:
Handle: RePEc:hhs:rbnkwp:0257

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Keywords: Collateral; credit rationing; differences-in-differences; floating lien; loan contracts; monitoring; natural experiment;

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Cited by:
  1. Kislat, Carmen & Menkhoff, Lukas & Neuberger, Doris, 2013. "The use of collateral in formal and informal lending," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79765, Verein für Socialpolitik / German Economic Association.
  2. Degryse, H.A. & Ioannidou, V. & Schedvin, E.L. von, 2011. "On the Non-Exclusivity of Loan Contracts: An Empirical Investigation," Discussion Paper 2011-130, Tilburg University, Center for Economic Research.

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