Why Do Banks Ask for Collateral and Which Ones?

Régis Blazy and Laurent Weill

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

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.

Keywords: Collateral; Bank; Credit Risk. (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (5)

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Working Paper: Why Do Banks Ask for Collateral and Which Ones ? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:06-07

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