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Do banks extract informational rents through collateral?

Author

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  • Bing Xu
  • Honglin Wang
  • Adrian Van Rixtel

Abstract

This paper investigates if informational monopolies resulting from relationship lending and bank market concentration allow for rent extraction through collateral. Our identification strategy hinges on the notion that informational equalization shocks (such as equity IPOs) erode rent seeking opportunities, while competing theories do not rely on information asymmetries among lenders. Using a unique hand-collected database of 9,288 bank loans obtained by 649 listed Chinese firms, we find that collateral incidence is positively associated with relationship intensity and bank market concentration, while this effect is moderated for post-IPO loans. These results are obtained controlling for a large number of loan and firm characteristics, monetary policy variables and regional macroeconomic characteristics. We also demonstrate important cross-sectional variation among borrowing firms: rent extraction through collateral is significantly less pronounced for less risky firms. Our results hold for a battery of robustness tests, both included in the paper and in an Internet appendix (available upon request). Furthermore, we provide new evidence on the determinants of collateral in Chinese bank lending markets.

Suggested Citation

  • Bing Xu & Honglin Wang & Adrian Van Rixtel, 2015. "Do banks extract informational rents through collateral?," BIS Working Papers 522, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:522
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    Cited by:

    1. Hyun Song Shin, 2017. "Breaking free of the triple coincidence in international finance," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Statistical implications of the new financial landscape, volume 43, Bank for International Settlements.
    2. Eric Tassel, 2022. "Relationship Lending and Liquidation Under Imperfect Information," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(1), pages 151-165, February.
    3. Xu, Bing, 2019. "Permissible collateral and access to finance: Evidence from a quasi-natural experiment," China Economic Review, Elsevier, vol. 54(C), pages 237-255.
    4. Gareth Anderson & Saleem Bahaj & Matthieu Chavaz & Angus Foulis & Gabor Pinter, 2023. "Lending Relationships and the Collateral Channel," Review of Finance, European Finance Association, vol. 27(3), pages 851-887.
    5. Bing Xu, 2017. "Permissible collateral and access to finance: evidence from a quasi-natural experiment," Working Papers 1750, Banco de España.
    6. Xu, Bing, 2018. "Permissible collateral and access to finance: Evidence from a quasi-natural experiment," BOFIT Discussion Papers 3/2018, Bank of Finland Institute for Emerging Economies (BOFIT).
    7. Dmytro Osiichuk & Paweł Wnuczak, 2023. "Do Corporate Consolidations Affect the Competitive Positioning of Non-Financial Firms in China?," SAGE Open, , vol. 13(4), pages 21582440231, December.
    8. repec:zbw:bofitp:2018_003 is not listed on IDEAS
    9. Fengyan Yu & Qi Liang & Wei Wang, 2020. "State ownership and banks’ information rents: Evidence from China," The Financial Review, Eastern Finance Association, vol. 55(2), pages 277-306, May.

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    More about this item

    Keywords

    Informational rents; collateral; relationship lending; market structure; IPOs; China;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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