Pledgeability and Bank Lending Technology
41 Pages Posted: 22 Mar 2021 Last revised: 6 Jul 2021
Date Written: March 10, 2021
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: Suggested Citation