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The impact of the recent financial crisis on bank loan interest rates and guarantees

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  • Giorgio Calcagnini

    ()
    (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")

  • Fabio Farabullini

    ()
    (Bank of Italy)

  • Germana Giombini

    ()
    (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")

Abstract

The paper analyzes the role of guarantees on loan interest rates before and during the recent financial crisis in Italian firm financing. The paper improves on existing literature by distinguishing between real and personal guarantees. Further, the paper investigates the potential different role of guarantees in the bank-borrower relationship during the recent financial crisis. This paper draws from individual Italian bank and firm data taken from the Banks’ Supervisory Reports to the Bank of Italy and the Central Credit Register over the period 2006-2009. Our analysis demonstrates that collateral affects the cost of credit of Italian firms by systematically reducing the interest rate of secured loans, while personal guarantees increase it. These effects are amplified during the crisis. Furthermore, guarantees are a more powerful instrument for ex-ante riskier borrowers than for safer borrowers. Indeed, riskier borrowers obtain significantly lower interest rates on secured loans than interest rate they would be charged on unsecured loans.

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File URL: http://www.econ.uniurb.it/RePEc/urb/wpaper/WP_12_02.pdf
File Function: First version, 2012
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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 1202.

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Length: 24 pages
Date of creation: 2012
Date of revision: 2012
Handle: RePEc:urb:wpaper:12_02

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Web page: http://www.econ.uniurb.it/
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Keywords: Financial crisis; Guarantees; Multilevel model.;

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  1. 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.
  2. 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.
  3. Antweiler, Werner, 2001. "Nested random effects estimation in unbalanced panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 101(2), pages 295-313, April.
  4. Manove, M. & Padilla, A.J. & Pagano, M., 1998. "Collateral vs. Project Screening: a Model of Lazy Banks," Papers, Centro de Estudios Monetarios Y Financieros- 9807, Centro de Estudios Monetarios Y Financieros-.
  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. Arito Ono & Iichiro Uesugi, 2009. "Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's SME Loan Market," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(5), pages 935-960, 08.
  7. Cowling, Marc, 2007. "The Role of Loan Guarantee Schemes in Alleviating Credit Rationing in the UK," MPRA Paper 1613, University Library of Munich, Germany.
  8. Sugato Chakravarty & Tansel Yilmazer, 2009. "A Multistage Model of Loans and the Role of Relationships," Financial Management, Financial Management Association International, Financial Management Association International, vol. 38(4), pages 781-816, December.
  9. Manove, Michael & Padilla, Atilano Jorge, 1998. "Banking (Conservatively) With Optimists," CEPR Discussion Papers 1918, C.E.P.R. Discussion Papers.
  10. Focarelli, Dario & Pozzolo, Alberto Franco & Casolaro, Luca, 2008. "The pricing effect of certification on syndicated loans," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(2), pages 335-349, March.
  11. Peter Ebbes & Ulf Böckenholt & Michel Wedel, 2004. "Regressor and random-effects dependencies in multilevel models," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 58(2), pages 161-178.
  12. Pozzolo, Alberto Franco, 2004. "The Role of Guarantees in Bank Lending," Economics & Statistics Discussion Papers esdp04021, University of Molise, Dept. EGSeI.
  13. 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.
  14. Arthur Lewbel, 1997. "Constructing Instruments for Regressions with Measurement Error when no Additional Data are Available, with an Application to Patents and R&D," Econometrica, Econometric Society, Econometric Society, vol. 65(5), pages 1201-1214, September.
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