Collateral and Competition

FRB of Philadelphia Working Paper No. 02-22

41 Pages Posted: 20 May 2003

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department

Date Written: December 20, 2002

Abstract

We examine the effects of changes in competitive conditions on the structure of loan contracts. In particular, we present conditions in which greater loan market competition reduces the stringency of contractual collateral requirements, a prediction that is consistent with anecdotal evidence from loan markets. We also analyze the interaction between the degree of competition and the efficiency of contractual renegotiations. Insufficiently competitive markets may lead to bargaining difficulties that reduce the efficiency of renegotiable contracts. At low levels of competition negotiable contracts remain feasible only if collateral levels are set inefficiently low.

Keywords: contracts, collateral, covenants, bank loans, competition

JEL Classification: G20, G21, D43, L14, E44

Suggested Citation

Butler, Alexander W. and Berlin, Mitchell, Collateral and Competition (December 20, 2002). FRB of Philadelphia Working Paper No. 02-22. Available at SSRN: https://ssrn.com/abstract=392500 or http://dx.doi.org/10.2139/ssrn.392500

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Mitchell Berlin (Contact Author)

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
215-574-3822 (Phone)
215-574-4364 (Fax)

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