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The Collateral Channel and Bank Credit

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Abstract

We identify the firm-level and aggregate effects of collateral price shocks on business lending and investment — also known as the collateral channel — using detailed bank-firm-loan level data that allow us to observe the pledging of real estate collateral and to control for credit demand and supply conditions. At the firm level, a 1-percentage-point increase in collateral values leads to an increase of 12 basis points in credit growth, whereas the average elasticity of credit to collateral values in the cross-section of metropolitan statistical areas (MSAs) is seven times larger. Our estimates imply that as much as 37 percent of employment growth over the period from 2013 to 2019 can be attributed to the relaxation of borrowing constraints on bank-dependent borrowers.

Suggested Citation

  • Arun Gupta & Horacio Sapriza & Vladimir Yankov, 2023. "The Collateral Channel and Bank Credit," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, vol. 23(33), October.
    • Handle: RePEc:fip:fedreb:97013
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    File URL: https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-33
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    Cited by:

    1. Arun Gupta & Horacio Sapriza, 2022. "Do Costly Internal Equity Injections Reveal Bank Expectations about Post-Crisis Real Outcomes?," Working Paper 23-03, Federal Reserve Bank of Richmond.
    2. Gabriel, Ricardo Duque, 2024. "The Credit Channel of Public Procurement," Journal of Monetary Economics, Elsevier, vol. 147(S).

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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