Pledgeability and Bank Lending Technology

41 Pages Posted: 22 Mar 2021 Last revised: 6 Jul 2021

See all articles by Swarnava Biswas

Swarnava Biswas

University of Bristol

Tobias Dieler

University of Bristol - Department of Finance and Accounting

Wei Zhai

Central University of Finance and Economics (CUFE)

Date Written: March 10, 2021

Abstract

An increase in collateral availability can reduce the need for bank auditing. We test this hypothesis using reforms which expanded the set of pledgeable assets in secured lending, and find heterogeneous effects in the cross-section of banks. Smaller (relationship) banks are safer and earn a lower risk-adjusted net interest income post-reform, after controlling for lending volume; a fall in their operating costs offsets the negative effect. Larger (arm's-length) banks increase lending volume but are not more profitable. We guide our empirical analysis using an adverse selection lending model in which collateral and auditing are substitute screening devices.

Keywords: Interest income; Non-interest income; Collateral reforms; Secured lending; Collateral menus

JEL Classification: G21; G28; K22

Suggested Citation

Biswas, Swarnava and Dieler, Tobias and Zhai, Wei, Pledgeability and Bank Lending Technology (March 10, 2021). Available at SSRN: https://ssrn.com/abstract=3801622 or http://dx.doi.org/10.2139/ssrn.3801622

Swarnava Biswas

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Tobias Dieler

University of Bristol - Department of Finance and Accounting ( email )

Tyndalls Park Road 15-19
Bristol, BS8 1PY
United Kingdom

HOME PAGE: http://sites.google.com/site/tobiasdieler/

Wei Zhai (Contact Author)

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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