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How collateral laws shape lending and sectoral activity

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  • Calomiris, Charles W.
  • Larrain, Mauricio
  • Liberti, José
  • Sturgess, Jason

Abstract

We demonstrate the central importance of creditors’ ability to use movable assets as collateral (as distinct from immovable real estate) when borrowing from banks. Using a unique cross-country micro-level loan data set containing loan-to-value ratios for different assets, we find that loan-to-values of loans collateralized with movable assets are lower in countries with weak collateral laws, relative to immovable assets, and that lending is biased toward the use of immovable assets. Using sector-level data, we find that weak movable collateral laws create distortions in the allocation of resources that favor immovable-based production and investment. An analysis of Slovakia's collateral law reform confirms our findings.

Suggested Citation

  • Calomiris, Charles W. & Larrain, Mauricio & Liberti, José & Sturgess, Jason, 2017. "How collateral laws shape lending and sectoral activity," Journal of Financial Economics, Elsevier, vol. 123(1), pages 163-188.
  • Handle: RePEc:eee:jfinec:v:123:y:2017:i:1:p:163-188
    DOI: 10.1016/j.jfineco.2016.09.005
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    Cited by:

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    3. Beutler, Toni & Grobéty, Mathieu, 2019. "The collateral channel under imperfect debt enforcement," European Economic Review, Elsevier, vol. 111(C), pages 336-359.
    4. Bryan Hardy, 2018. "Foreign currency borrowing, balance sheet shocks and real outcomes," BIS Working Papers 758, Bank for International Settlements.
    5. Nuri Ersahin & Rustom M. Irani & Katherine Waldock, 2016. "Creditor Rights and Entrepreneurship: Evidence from Fraudulent Transfer Law," Working Papers 16-31, Center for Economic Studies, U.S. Census Bureau.
    6. Bellucci, Andrea & Borisov, Alexander & Giombini, Germana & Zazzaro, Alberto, 2015. "Collateral and Local Lending: Testing the Lender-Based Theory," HIT-REFINED Working Paper Series 21, Institute of Economic Research, Hitotsubashi University.
    7. José Garrido & Emanuel Kopp & Anke Weber, 2016. "Cleaning-up Bank Balance Sheets; Economic, Legal, and Supervisory Measures for Italy," IMF Working Papers 16/135, International Monetary Fund.
    8. Ongena, Steven & Cerqueiro, Geraldo & Roszbach, Kasper, 2016. "Collateral damage? On collateral, corporate financing and performance," Working Paper Series 1918, European Central Bank.
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    13. Bing Xu, 2017. "Permissible collateral and access to finance: evidence from a quasi-natural experiment," Working Papers 1750, Banco de España;Working Papers Homepage.
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    15. Jagjit Chadha & Young-Kwan Kang, 2016. "Finance and Credit in a Model of Monetary Policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 471, National Institute of Economic and Social Research.
    16. Degryse, Hans & Ioannidou, Vasso & Liberti, Jose Maria & Sturgess, Jason, 2016. "When Do Laws and Institutions Affect Recovery Rates on Collateral?," CEPR Discussion Papers 11406, C.E.P.R. Discussion Papers.
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    20. Luis Araujo & Qingqing Cao & Raoul Minetti & Pierluigi Murro, 2019. "Credit Crunches, Asset Prices and Technological Change"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 153-179, April.
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    22. International Monetary Fund, 2015. "Italy; Selected Issues," IMF Staff Country Reports 15/167, International Monetary Fund.
    23. Black, Lamont K. & Krainer, John & Nichols, Joseph B., 2017. "Safe Collateral, Arm’s-Length Credit: Evidence from the Commercial Real Estate Market," Working Paper Series 2017-19, Federal Reserve Bank of San Francisco.
    24. Korinek, Anton, 2018. "Regulating capital flows to emerging markets: An externality view," Journal of International Economics, Elsevier, vol. 111(C), pages 61-80.

    More about this item

    Keywords

    Movable collateral; Immovable collateral; Collateral laws; Creditor rights; Loan-to-value ratios;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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