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Why Do Banks Ask for Collateral and Which Ones?

Author

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  • Régis Blazy

    () (Luxembourg School of Finance, University of Luxembourg)

  • Laurent Weill

Abstract

We examine why banks resort to collateral, and whether their reasons vary according to the type of collateral. We use a unique dataset of bank loans granted to French distressed firms, which contains full information on the type and value of collaterals and the cause of firm default. Our work suggests that information asymmetries are not of prime importance in the decision of the bank to secure a loan, as no type of collateral helps to solve adverse selection and moral hazard problems. The reduction of the loan loss and the observed-risk hypothesis may however explain the use of collateral.

Suggested Citation

  • Régis Blazy & Laurent Weill, 2006. "Why Do Banks Ask for Collateral and Which Ones?," LSF Research Working Paper Series 06-07, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:06-07
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    References listed on IDEAS

    as
    1. 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.
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    5. Marc Cowling, 1999. "The incidence of loan collateralization in small business lending contracts: evidence from the UK," Applied Economics Letters, Taylor & Francis Journals, vol. 6(5), pages 291-293.
    6. Degryse, Hans & Van Cayseele, Patrick, 2000. "Relationship Lending within a Bank-Based System: Evidence from European Small Business Data," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 90-109, January.
    7. John S. Gonas & Michael J. Highfield & Donald J. Mullineaux, 2004. "When Are Commercial Loans Secured?," The Financial Review, Eastern Finance Association, vol. 39(1), pages 79-99, February.
    8. 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.
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    11. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. 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.
    2. Evžen Kocenda & Martin Vojtek, 2011. "Default Predictors in Retail Credit Scoring: Evidence from Czech Banking Data," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(6), pages 80-98, November.
    3. Amedeo Argentiero, 2009. "Some New Evidence on the Role of Collateral: Lazy Banks or Diligent Banks?," ISAE Working Papers 113, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).

    More about this item

    Keywords

    Collateral; Bank; Credit Risk.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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