Bank Competition and Collateral: Theory and Evidence

26 Pages Posted: 13 Oct 2008 Last revised: 29 Jul 2009

See all articles by Laurent Weill

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Christophe J. Godlewski

University of Strasbourg - Faculty of Law and Business; EM Strasbourg Business School; LaRGE Research Center

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2008

Abstract

We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking collateral. We show that presence of collateral is more likely when bank competition is lower. We then test empirically this prediction on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions of a negative role of bank competition on the presence of collateral. These findings survive several robustness checks.

Keywords: Collateral, Bank Competition, Asymmetric information

Suggested Citation

Weill, Laurent and Hainz, Christa and Godlewski, Christophe J., Bank Competition and Collateral: Theory and Evidence (October 10, 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=1282168 or http://dx.doi.org/10.2139/ssrn.1282168

Laurent Weill (Contact Author)

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81069
Germany

Christophe J. Godlewski

University of Strasbourg - Faculty of Law and Business ( email )

1 place d'Athènes
Strasbourg, 67000
France

HOME PAGE: http://droit.unistra.fr/

EM Strasbourg Business School ( email )

61 Avenue de la Forêt Noire
Strasbourg, 67000
France

HOME PAGE: http://www.em-strasbourg.eu/

LaRGE Research Center ( email )

1 place d'Athènes
Strasbourg, 67000
France

HOME PAGE: http://droit.unistra.fr/

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