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Collateral and Local Lending: Testing the Lender-Based Theory

Author

Listed:
  • Andrea Bellucci

    (Institute for Applied Economic Research (IAW), University of Tubingen, Germany)

  • Alexander Borisov

    (University of Cincinnati, USA)

  • Germana Giombini

    (Universit… di Urbino)

  • Alberto Zazzaro

    () (Universit… Politecnica delle Marche, MoFiR - Ancona, Italy, CSEF, Naples, Italy)

Abstract

In this paper we empirically test the recent lender-based theory for the use of collateral in bank lending. Based on a proprietary dataset of loan contracts written by a local bank in competitive credit markets, we use the physical proximity between borrowers and the lending branch of the bank to capture its information advantage and the magnitude of collateral-related transaction costs. Overall, our results seem more consistent with several classic borrower-based explanations rather than with the lender-based view. We show that, conditional on obtaining credit from the local bank, more distant borrowers experience higher collateral requirements and lower interest rates. Moreover, competitive pressure from transaction lenders does not magnify the importance of lender-to-borrower distance. Our findings are also obtained with estimation techniques that allow for endogenous loan contract terms and joint determination of collateral and interest rates.

Suggested Citation

  • Andrea Bellucci & Alexander Borisov & Germana Giombini & Alberto Zazzaro, 2015. "Collateral and Local Lending: Testing the Lender-Based Theory," Mo.Fi.R. Working Papers 106, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  • Handle: RePEc:anc:wmofir:106
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank lending; Collateral; Distance; Interest Rate;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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