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Bank Competition and Collateral: Theory and Evidence

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  • Christa Hainz
  • Laurent Weill
  • Christophe Godlewski

Abstract

We investigate the impact of bank competition on the use of collateral in loan contracts. We analyze asymmetric information about the borrowers’ type in a Salop model in which banks choose between screening the borrower and asking for collateral. We show that the presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Christa Hainz & Laurent Weill & Christophe Godlewski, 2013. "Bank Competition and Collateral: Theory and Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(2), pages 131-148, October.
  • Handle: RePEc:kap:jfsres:v:44:y:2013:i:2:p:131-148
    DOI: 10.1007/s10693-012-0141-3
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    More about this item

    Keywords

    Collateral; Bank competition; Asymmetric information; G21; D43; D82;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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