Why Do Banks Ask for Collateral and Which Ones ?

Régis Blazy and Laurent Weill

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: This paper aims at testing empirically the three major theoretical reasons why banks resort to collateral: reduction of loan loss in the event of default, adverse selection, and moral hazard. This investigation is performed by testing whether the reasons vary according to the type of collateral. We use a unique dataset of bank loans granted to French distressed firms, which contains the full information on debt contract characteristics, including the cause of default, the type and the value of all collaterals. 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:lar:wpaper:2006-03

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