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Loans, Interest Rates and Guarantees: Is There a Link?

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Author Info

  • Giorgio Calcagnini

    ()
    (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))

  • Fabio Farabullini

    (Banca d'Italia (Italy))

  • Germana Giombini

    ()
    (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))

Abstract

This paper aims at shedding light on the influence of guarantees on the loan pricing. After reviewing the literature on the role of guarantees in bank lending decisions, we estimate a bank interest rate model that explicitly includes collateral and personal guarantees as explanatory variables. We show that banks follow different lending policies according to the type of customer. In the case of firms banks seem to efficiently screen and monitor customers, and guarantees (real and personal) are used to reduce moral hazard problems. In the case of consumer households and sole proprietorships banks behave “lazily” by replacing screening and monitoring activities with personal guarantees. Collateral, instead, is used to separate good from bad customers (i.e., to mitigate adverse selection problems).

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File URL: http://www.econ.uniurb.it/RePEc/urb/wpaper/WP_09_04.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini in its series Working Papers with number 0904.

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Length: 27 pages
Date of creation: 2009
Date of revision: 2009
Handle: RePEc:urb:wpaper:09_04

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Web page: http://www.econ.uniurb.it/
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Related research

Keywords: Banking Crisis; Determination of Interest Rates; Banks; Asymmetric and Private Information.;

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References

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  1. Manove, M. & Padilla, A.J., 1997. "Banking (Conservatively) with Optimists," Papers 9718, Centro de Estudios Monetarios Y Financieros-.
  2. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  3. John, Kose & Lynch, Anthony W. & Puri, Manju, 2002. "Credit Ratings, Collateral and Loan Characteristics: Implications for Yield," Research Papers 1748, Stanford University, Graduate School of Business.
  4. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
  5. 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.
  6. João A. C. Santos & Stanley D. Longhofer, 1998. "The importance of bank seniority for relationship lending," BIS Working Papers 58, Bank for International Settlements.
  7. Sugato Chakravarty & Tansel Yilmazer, 2005. "A re-examination of the role of relationships in the loan-granting process," Proceedings 960, Federal Reserve Bank of Chicago.
  8. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
  9. Helmut Bester, 1990. "The Role of Collateral in a Model of Debt Renegotiation," CEPR Financial Markets Paper 0001, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  10. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  11. Inderst, Roman & Mueller, Holger M., 2007. "A lender-based theory of collateral," Journal of Financial Economics, Elsevier, vol. 84(3), pages 826-859, June.
  12. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
  13. Pozzolo, Alberto Franco, 2004. "The Role of Guarantees in Bank Lending," Economics & Statistics Discussion Papers esdp04021, University of Molise, Dept. SEGeS.
  14. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  15. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  16. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
  17. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-72, May.
  18. 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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Citations

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Cited by:
  1. Lukas Menkhoff & Doris Neuberger & Ornsiri Rungruxsirivorn, 2011. "Collateral and its Substitutes in Emerging Markets' Lending," CESifo Working Paper Series 3585, CESifo Group Munich.
  2. Giacomo Cau & Massimiliano Stacchini, 2010. "The certification role of bank directors on;corporate boards," Mo.Fi.R. Working Papers 46, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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