The role of guarantees in bank lending

Alberto Pozzolo

No 528, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Guarantees play an important role in debt contracts. They alter the risk for the lender, transform borrowers� incentives and, possibly, modify the equilibrium allocation of financial resources. This paper studies the role of guarantees on bank loans, using a sample of over 50,000 individual lines of credit granted by Italian banks. Two empirical models are used. The first directly verifies the relationship between ex-ante publicly available information on borrowers� default riskiness and the presence of guarantees on their bank loans; the second compares the interest rates charged on secured and unsecured loans made by different banks to the same borrower, thus perfectly controlling for idiosyncratic riskiness and singling out the direct effect of the presence of guarantees on credit risk. The empirical results show that real guarantees (physical assets or equities that the lender can sell if the borrower defaults), which are often internal, are mainly used to provide a priority to some creditors. Personal guarantees (contractual obligations of third parties to make payments in case of default, e.g. suretyships), which can only be external, are used instead as incentive devices against moral hazard problems. Controlling for borrowers� characteristics, both real and personal guarantees reduce ex-ante credit risk.

Keywords: Bank loans; collateral; guarantee (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Related works:
Working Paper: The Role of Guarantees in Bank Lending (2004)
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