Collateralization, Bank Loan Rates and Monitoring

54 Pages Posted: 11 Aug 2011 Last revised: 18 Feb 2014

See all articles by Geraldo Cerqueiro

Geraldo Cerqueiro

Catolica-Lisbon SBE

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business

Date Written: January 4, 2014

Abstract

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

Cerqueiro, Geraldo and Ongena, Steven R. G. and Roszbach, Kasper F., Collateralization, Bank Loan Rates and Monitoring (January 4, 2014). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1908097 or http://dx.doi.org/10.2139/ssrn.1908097

Geraldo Cerqueiro

Catolica-Lisbon SBE ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kasper F. Roszbach (Contact Author)

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

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