The Collateral Channel and Bank Credit

Abstract

We identify the firm-level and aggregate effects of the collateral channel using detailed bank-firm-loan level data that allow us to observe the pledging of real estate collateral and to control for credit demand and supply conditions. At the firm level, a 1 percent increase in collateral values leads to a 12 bps higher credit growth, whereas, in the cross-section of MSAs, the average elasticity of credit to collateral values is 7 times larger. Our estimates imply that as much as 37 percent of employment growth over the period from 2013 to 2019 can be attributed to the relaxation of borrowing constraints at bank-dependent borrowers.

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

JEL Classification: E44, G21