Collateralization, Bank Loan Rates and Monitoring
54 Pages Posted: 11 Aug 2011 Last revised: 18 Feb 2014
Date Written: January 4, 2014
We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique dataset from a large bank containing timely assessments of collateral values, in conjunction with a legal reform that exogenously reduced those values, we find that the bank responded to this change by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring delinquency of borrowers on outstanding claims. We so explain why banks are senior lenders and quantify the value of claimant priority.
Keywords: collateral, credit rationing, differences-in-differences, floating lien, loan contracts, monitoring, natural experiment
JEL Classification: D82, G21
Suggested Citation: Suggested Citation