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Some New Evidence on the Role of Collateral: Lazy Banks or Diligent Banks?

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  • Amedeo Argentiero

    (University of Rome Tor Vergata - Dept. of Economics and ISAE - Institute for Studies and Economic Analyses)

Abstract

In the banking literature (Manove et al. (2001)) "Lazy Banks" are defined as those banks that substitute project screening with collateral. This paper aims to test for Italy some empirical implications of the theoretical model of "Lazy Banks": the negative relationship between collateral and project screening, whether collateral is posted by safer borrowers and law enforcement is able to increase the degree of collateralization. Empirical evidence presented here suggests that, both for long-term loans and short-term ones, when project screening increases, the amount of real guarantees with respect to the credit granted increases. Moreover, the data show that collateral seems to be posted by high-risk borrowers and law enforcement does not matter in explaining the presence of real guarantees for long-term loans, whereas it represents a further risk component that generates an increase in collateral for short-term loans. Therefore, a model of "Lazy Banks" does not seem to be verified on the data, suggesting the results rather a sort of "diligence" in the banks' behavior. Furthermore, the empirical findings on our data reveal that the presence of real guarantees is not able to lower ex-post default credit risk. These results are consistent with a view of collateral as a credible mechanism for commitment against informative asymmetries and not as a convenient hedge against realized ex-post credit default risk.

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Bibliographic Info

Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 113.

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Length: 61 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:isa:wpaper:113

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Keywords: Collateral; Screening; Lazy Banks; Default Risk.;

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  1. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
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  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, vol. 32(4), pages 726-44, Winter.
  8. Arito Ono & Iichiro Uesugi, 2005. "The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market," Discussion papers 05027, Research Institute of Economy, Trade and Industry (RIETI).
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  15. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Banks, Distances and Firms' Financing Constraints," Review of Finance, European Finance Association, vol. 13(2), pages 261-307.
  16. Brick, Ivan E. & Palia, Darius, 2007. "Evidence of jointness in the terms of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 452-476, July.
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Cited by:
  1. Badulescu Daniel & Petria Nicolae, 2011. "Collateral'S Importance In Smes Financing: What Is The Banks' Response? Some Evidence For Romania," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 256-260, July.
  2. Cerqueiro, G.M. & Ongena, S. & Roszbach, K., 2011. "Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment," Discussion Paper 2011-087, Tilburg University, Center for Economic Research.

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