The Collateral Channel and Bank Credit

Abstract

Our paper studies the role of the collateral channel for bank credit using a confidential bank-firm-loan data set. We find that the use of real estate collateral is concentrated in private bank-dependent borrowers and in markets with low real estate supply elasticities. We identify the sensitivity of firms' borrowing capacity to commercial real estate values controlling for firm-, bank-, and market-level characteristics as well as credit demand factors identified from the micro-panel data. We estimate that for every percent increase in collateral values, firms pledging real estate collateral experience 12 basis point higher growth in bank lending with higher sensitivities for more constrained firms. By relaxing borrowing constraints and increasing credit to bank-dependent borrowers, higher real estate values boost firm capital expenditures, and lead to aggregate effects associated with lower unemployment, higher employment growth and business creation. Our estimates imply that as much as 37 percent of employment variation can be attributed to relaxation of borrowing constraints over the period from 2013 to 2019. By highlighting the importance of real estate collateral for bank-dependent borrowers, our study contributes to a growing empirical literature that explores the importance of the collateral channel for macroeconomic fluctuations.

Keywords: Collateral channel, firm borrowing constraints, bank credit allocation, corporate investment, macro-finance mechanisms

JEL Classification: E44, G21