Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment

Geraldo Cerqueiro (), Steven Ongena and Kasper Roszbach ()
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Geraldo Cerqueiro: Universidade Católica Portuguesa, Postal: Palma de Cima, 1649-023 Lisbon, Portugal

No 257, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We study a change in the Swedish law that exogenously reduced the value of all outstanding company mortgages, i.e., a type of collateral that is comparable to the floating lien. We explore this natural experiment to identify how collateral determines borrower quality, loan terms, access to credit and bank monitoring of business term loans. Using a differences-in-differences approach, we find that following the change in the law and the loss in collateral value borrowers pay a higher interest rate on their loans, receive a worse quality assessment by their bank, and experience a substantial reduction in the supply of credit by their bank. The reduction in collateral value also precedes a decrease in bank monitoring intensity and frequency of both the collateral and the borrower, consistent with models in which the pledging of risky assets incentivizes banks to monitor.

Keywords: Collateral; credit rationing; differences-in-differences; floating lien; loan contracts; monitoring; natural experiment (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-02-01
New Economics Papers: this item is included in nep-cfn, nep-cta and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://www.riksbank.se/Documents/Rapporter/Working ... rap_wp257_120224.pdf (application/pdf)

Related works:
Working Paper: Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment (2012)
Working Paper: Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment (2011)
Working Paper: Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment (2011)
Working Paper: Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0257

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