SME Collateral: risky borrowers or risky behaviour?

James Carroll and Fergal McCann ()
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James Carroll: Trinity College Dublin

No 06/RT/17, Research Technical Papers from Central Bank of Ireland

Abstract: We explore two motives in a bank’s use of collateral: an ex-ante stock-of-risk effect, whereby banks secure observably riskier loans to reduce future losses; an ex-post flow-of-risk effect, whereby banks use collateral to lower the probability of reduced borrower effort. Using loan-level data on Irish enterprise lending, we explore these two mechanisms. We confirm the stock-of-risk hypothesis while finding no evidence that collateral reduces the ex-post flow-of-risk. We also highlight the importance of loan size by showing that banks secure almost all loans in the top quintile of loan size regardless of risk rating, whereas among smaller loans, collateralisation is higher for riskier loans.

Keywords: SME; Collateral; Risk; Moral Hazard (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-ban and nep-rmg
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