Determinants of collateral

This paper investigates the factors that determine the use of collateral in time series and cross-section data on the population of banks' loans to Spanish firms every year from 1984 to 2002 (over two million loans). Using the record of actual loan defaults of borrowers as a measure of credit quality, we find that the use of collateral is higher in loans to low credit quality borrowers. The likelihood of collateral is also higher when the lender is a small bank, when the lender is a savings bank and in loans made in periods of low economic growth. On the other hand, the use of collateral is less likely in loans made to borrowers with longer relationship with the lender and in more concentrated credit markets. A higher risk free interest rate of the economy and a smaller size of the loan increase the likelihood that a loan will be totally secured with collateral instead of partially secured. Overall the result are consistent with theories that explain the use of collateral as a consequence of information asymmetries in credit markets, although the effect of macroeconomic conditions in the use of collateral remains unexplained.