Collateralization of business loans: Testing the prediction of theories (original) (raw)

The ability of banks to lend to informationally opaque small businesses

Journal of Banking & Finance, 2001

We test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms using a rich new data set on Argentinean banks, firms, and loans. We also test hypotheses about borrowing from a single bank versus multiple banks. Our results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms. Bank distress appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, raising borrowing costs and destroying some relationship benefits. JEL Classification Numbers: G21, G15, G28, G34, E58

Collateral, type of lender and relationship banking as determinants of credit risk q

This paper analyses the determinants of the probability of default (PD) of bank loans. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank-borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988-2000) collected by the Bank of Spain's Credit Register (Central de Informaci on de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank-borrower relationship increases the willingness to take more risk.

Collateral, type of lender and relationship banking as determinants of credit risk

Journal of Banking & Finance, 2004

This paper analyses the determinants of the probability of default (PD) of bank loans. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank-borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000) collected by the Bank of Spain's Credit Register (Central de Informaci on de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank-borrower relationship increases the willingness to take more risk.

The Impact of Information Sharing on the Use of Collateral versus Guarantees

SSRN Electronic Journal, 2017

This study exploits contract-level data from Bosnia and Herzegovina to assess the impact of a new credit registry on the use of borrower collateral versus third-party guarantees. Among first-time borrowers, the introduction of mandatory information sharing leads to a shift from collateral to guarantees, in particular for riskier borrowers. Among repeat borrowers, both collateral and guarantee requirements decline in proportion to the length of the lending relationship. These results suggest that information sharing can both reduce adverse selection among new borrowers and holdup problems among repeat borrowers.

Borrower distress and the efficiency of relationship banking

Journal of Banking & Finance, 2018

We propose that relationship bankers are able to benefit their clients even after they indicate distress. Relationship bankers continually learn about their clients to reduce the asymmetric information problem, reduce adverse selection risk and manage loan risk. We examine the consequences of corporate disclosure, namely profit warnings, as a negative information-releasing event during the normal course of business and evaluate the evolving nature of relationship banking before and after such an event. We show that lenders generally increase the cost of loans, loan security and reduce loan maturity after profit warnings. The average loan spread increases by 17-37 basis points holding all else constant. However, borrowing from relationship lenders lowers the loan spread by 17 basis points compared to borrowing from non-relationship lenders, implying that relationship lenders are able to benefit borrowers. Moreover, borrowers often choose to remain with their relationship bankers due to more favorable loan terms and the high costs of switching lenders. Ultimately, these borrowers end up reducing their default risk and improving their profitability after the profit warning. Our results remain robust even when we control for firms that did not issue profit warnings. We conclude that relationship bankers efficiently use client information to provide effective financial intermediation, even after distress.

Mitigating Information Asymmetries through Collateral Pledges

2012

This study determines if small business collateral requirements differ between racial/ethnic and gender groups and how firm, loan, and market characteristics impact any differences in these terms. Previous literature establishes that Hispanics, Blacks, and females are considered riskier than their non-minority and male counterparts, receiving more loan denials and higher loan costs. Lenders mitigate asymmetric information by monitoring or influencing riskier borrowers through the use of non-price loan factors such as collateral requirements. Data from the Federal Reserve's Survey of Small Business Finances is analyzed to determine whether lenders impose larger collateral requirements on minority and female small businesses as a way to monitor this group of borrowers. A Blinder-Oaxaca decomposition is used to demonstrate how variations in collateral requirements are influenced by identifying characteristics. Decomposition results show differences collateral requirements and much of the evidenced gap is attributed to differences in levels of banking competition in borrower markets, loan interest rates, and loan amounts.

Information verifiability, bank organization, bank competition and bank–borrower relationships

Journal of Banking & Finance, 2011

This paper investigates whether the benefits of bank-borrower relationships differ depending on three factors identified in the theoretical literature: verifiability of information, bank size and complexity, and bank competition. We extend the current literature by analyzing how relationship lending affects loan contract terms and credit availability in an empirical model that simultaneously accounts for all three of these factors. Also, our unique data set of Japanese SMEs allows us to examine for the first time using micro firm data the value of information verifiability in the form of audited financial statements in setting loan contract terms. We find that firms benefit most from bank-borrower relationships when they do not have audited financial statements and when they borrow from small banks in less competitive markets, which is consistent with a number of different theoretical studies.

Collateral, relationship lending and family firms

Small Business Economics, 2010

Prior research suggested that relationship lending could play a role in solving asymmetric information problems between borrower and lender. Other studies suggest a relationship between family ownership and the shareholder-bondholder agency conflict. The present paper investigates the impact of relationship characteristics, family ownership and their interaction effects upon the use of collateral in SME lending. We examine the determinants of collateral as well as the determinants of the choice between business and personal collateral using decision tree analysis. The results reveal that relationship characteristics have a significant influence, but not always in the direction as expected. Moreover, they do not seem to be the primary determinants in our classification models. The most important determinants in both classification models seem to be the loan amount, total assets and the family versus nonfamily firm distinction. In addition, we differentiate between line-of-credit and non-line-of-credit loans and find significant differences between these decision trees.

Collateral, default risk, and relationship lending: an empirical study on financial contracting

2000

This paper provides new insights into the nature of relationship lending by analyzing the role of collateral and its real effects with respect to workout activities. We use a unique data set based on credit files of five leading German banks, thus relying on real information used in the process of bank credit decision-making. In particular, risk assessment is derived from bank internal borrower ratings and a new proxy for identifying relationship lending is used. Furthermore, our data set contains information on banks workout activities relating to borrowers facing financial distress.