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

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

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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Paper provided by University of Urbino Carlo Bo, Department of Economics 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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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-04-25 (All new papers)
NEP-BAN-2009-04-25 (Banking)
NEP-CTA-2009-04-25 (Contract Theory & Applications)
NEP-MAC-2009-04-25 (Macroeconomics)

References listed on IDEAS
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Inderst, Roman & Mueller, Holger M, 2006. "A Lender-Based Theory of Collateral," CEPR Discussion Papers 5695, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Michael Manove & A. Jorge Padilla, 1999. "Banking (Conservatively) with Optimists," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 324-350, Summer. [Downloadable!] (restricted)
Other versions:
- Manove, Michael & Padilla, Atilano Jorge, 1998. "Banking (Conservatively) With Optimists," CEPR Discussion Papers 1918, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June. [Downloadable!] (restricted)
Kose John & Anthony W. Lynch & Manju Puri, 2003. "Credit Ratings, Collateral, and Loan Characteristics: Implications for Yield," Journal of Business, University of Chicago Press, vol. 76(3), pages 371-410, July. [Downloadable!]
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. [Downloadable!] (restricted)
Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May. [Downloadable!] (restricted)
Other versions:
- 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. [Downloadable!] (restricted)
Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August. [Downloadable!] (restricted)
Bester, Helmut, 1994. "The Role of Collateral in a Model of Debt Renegotiation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 72-86, February. [Downloadable!] (restricted)
Other versions:
- 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, 53--56 Great Sutton Street, London EC1V 0DG.
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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. [Downloadable!] (restricted)
Alberto Franco Pozzolo, 2004. "The role of guarantees in bank lending," Temi di discussione (Economic working papers) 528, Bank of Italy, Economic Research Department. [Downloadable!]
Other versions:
- Pozzolo, Alberto Franco, 2004. "The Role of Guarantees in Bank Lending," Economics & Statistics Discussion Papers esdp04021, University of Molise, Dept. SEGeS. [Downloadable!]
Longhofer, Stanley D. & Santos, Joao A. C., 2000. "The Importance of Bank Seniority for Relationship Lending," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 57-89, January. [Downloadable!] (restricted)
Other versions:
- João A. C. Santos & Stanley D. Longhofer, 1998. "The importance of bank seniority for relationship lending," BIS Working Papers 58, Bank for International Settlements. [Downloadable!]
- Stanley D. Longhofer & João A.C. Santos, 1998. "The importance of bank seniority for relationship lending," Working Paper 9808, Federal Reserve Bank of Cleveland. [Downloadable!]
- Stanley D. Longhofer & João A. C. Santos, 1999. "The importance of bank seniority for relationship lending," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 177-205.
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. [Downloadable!] (restricted)
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.
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. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Other versions:
- Allen N. Berger & Gregory F. Udell, 1988. "Collateral, loan quality, and bank risk," Finance and Economics Discussion Series 51, Board of Governors of the Federal Reserve System (U.S.).

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