Pledgeability and Bank Lending Technology

53 Pages Posted: 27 Oct 2022 Last revised: 7 Feb 2024

See all articles by Tobias Dieler

Tobias Dieler

University of Bristol - Department of Finance and Accounting

Wei Zhai

Central University of Finance and Economics (CUFE)

Date Written: October 10, 2021

Abstract

What is the effect of an expansion of eligible collateral on different lending technologies? We show that expanding eligible collateral (i) increases transactional (T) banks’ interest income and decreases relationship (R) banks’ interest income, (ii) increases average loan volume more for T- than for R-banks, (iii) decreases average loan risk and (iv) decreases T-banks’ non-interest income while it increases R-banks’ non-interest income. (v) In sum, T-banks’ profitability increases and R-bank’s profitability remains unaffected. Expanding the set of collateral from immovable to movable assets typically benefits SMEs because it allows them to obtain secured instead of unsecured loans. A-priori, it is not obvious whether SMEs would continue borrowing from R-banks or switch to T-banks. R-banks benefit from customer relationships and T-banks have the collateral screening technology in place. We show, competition among T- and R-banks gives T-banks a comparative ad- vantage but R-banks can substitute lost interest income with non-interest income.

Keywords: collateral, lending technology, transactional bank, relationship bank.

JEL Classification: G21; G28; K22.

Suggested Citation

Dieler, Tobias and Zhai, Wei, Pledgeability and Bank Lending Technology (October 10, 2021). Available at SSRN: https://ssrn.com/abstract=4259640 or http://dx.doi.org/10.2139/ssrn.4259640

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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