IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v23y2013i13p1109-1122.html
   My bibliography  Save this article

Why do banks ask for collateral in SME lending?

Author

Listed:
  • Régis Blazy
  • Laurent Weill

Abstract

Following the common use of collateral in SME lending, this article aims attesting empirically the three major theoretical reasons for using collateral: reduction of loan loss in the event of default, adverse selection and moral hazard. We use a unique dataset of 735 bank loans granted to French distressed SMEs, which contains full information on the type and value of collateral, and the cause of firm default. We observe that collateral contributes to reduce loan loss in the event of default, with differences among types of collateral in terms of the recovered value for a given initial value. However, we tend to show that collateral does not solve adverse selection problems, as there is a positive relationship between collateral and risk premium, nor moral hazard, as secured loans are not associated with a lower probability of moral hazard behaviour. These findings are observed for all types of collateral. Therefore, our work suggests that information asymmetries are not of prime importance in the decision of the bank to secure loans to SMEs. The reduction of the loan loss and the observed-risk hypothesis may explain the use of collateral.

Suggested Citation

  • Régis Blazy & Laurent Weill, 2013. "Why do banks ask for collateral in SME lending?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(13), pages 1109-1122, July.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:13:p:1109-1122
    DOI: 10.1080/09603107.2013.795272
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09603107.2013.795272
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
    2. Inderst, Roman & Mueller, Holger M., 2007. "A lender-based theory of collateral," Journal of Financial Economics, Elsevier, vol. 84(3), pages 826-859, June.
    3. 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 458-472, May.
    4. Hainz, Christa, 2003. "Bank competition and credit markets in transition economies," Journal of Comparative Economics, Elsevier, vol. 31(2), pages 223-245, June.
    5. 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.
    6. Berger, Allen N. & Scott Frame, W. & Ioannidou, Vasso, 2011. "Tests of ex ante versus ex post theories of collateral using private and public information," Journal of Financial Economics, Elsevier, vol. 100(1), pages 85-97, April.
    7. Sergei A. Davydenko & Julian R. Franks, 2008. "Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K," Journal of Finance, American Finance Association, vol. 63(2), pages 565-608, April.
    8. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
    9. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
    10. Avery, Robert B. & Bostic, Raphael W. & Samolyk, Katherine A., 1998. "The role of personal wealth in small business finance," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1019-1061, August.
    11. 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 671-689, October.
    12. Voordeckers, Wim & Steijvers, Tensie, 2006. "Business collateral and personal commitments in SME lending," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3067-3086, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anabela Marques Santos & Michele Cincera, 2018. "Sharing The Risk Of Innovative Investment: Assessing The Effect Of A New European Financing Instrument," iCite Working Papers 2018-029, ULB -- Universite Libre de Bruxelles.
    2. Fidrmuc, Jarko & Hainz, Christa, 2010. "Default rates in the loan market for SMEs: Evidence from Slovakia," Economic Systems, Elsevier, vol. 34(2), pages 133-147, June.
    3. Laurent Weill & Christophe J. Godlewski, 2009. "Collateral and Adverse Selection in Transition Countries," Eastern European Economics, Taylor & Francis Journals, vol. 47(1), pages 29-40, January.
    4. repec:taf:irapec:v:31:y:2017:i:3:p:339-356 is not listed on IDEAS
    5. Bin Liu & Charles Cullinan & Junrui Zhang & Fangjun Wang, 2016. "Loan guarantees and the cost of debt: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 48(38), pages 3626-3643, August.
    6. Blazy, Régis & Letaief, Aziza, 2017. "When secured and unsecured creditors recover the same: The emblematic case of the Tunisian corporate bankruptcies," Emerging Markets Review, Elsevier, vol. 30(C), pages 19-41.
    7. repec:taf:jbemgt:v:18:y:2017:i:4:p:650-675 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:23:y:2013:i:13:p:1109-1122. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.