Collateral Spread and Financial Development

37 Pages Posted: 8 Apr 2008 Last revised: 3 Apr 2009

See all articles by Jose Maria Liberti

Jose Maria Liberti

Northwestern University - Kellogg School of Management; DePaul University

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Abstract

We show that institutions that promotional development ease borrowing constraints by lowering the collateral spread, and shifting the composition of acceptable collateral towards firm-specific assets. Using a novel cross-country loan-level data set, we estimate collateral spread as the difference in rates of collateralization between high and low risk borrowers in a given economy. The average collateral spread is large but declines rapidly with financial development. A one standard deviation improvement in financial development due to stronger institutions leads to a reduction in collateral spread by one-half. We also find that the composition of collateralizable assets shifts towards non-specific assets (e.g. land) with increased risk. However, this shift is considerably smaller in more developed financial markets, thus enabling risky borrowers to use a larger variety of assets as collateral.

Keywords: collateral, financial development, banks, emerging markets

JEL Classification: G21, G33, K11, K12, O12

Suggested Citation

Liberti, Jose Maria and Mian, Atif R., Collateral Spread and Financial Development. Available at SSRN: https://ssrn.com/abstract=1117738 or http://dx.doi.org/10.2139/ssrn.1117738

Jose Maria Liberti (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs 4203
Evanston, IL 60208
United States
(847) 491-5861 (Phone)
(847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/liberti_jose.aspx

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
(312) 362-8739 (Phone)
(312) 362-6566 (Fax)

Atif R. Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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