Research Discussion Papers, Bank of Finland
No 27/2008:
Bank competition and collateral: theory and evidence
Christa Hainz ()
, Laurent Weill ()
and Christophe Godlewski ()
Abstract: We investigate the impact of bank competition on the use
of collateral in loan contracts. We develop a theoretical model
incorporating information asymmetries in a spatial competition framework
where banks choose between screening the borrower and asking for
collateral. We show that presence of collateral is more likely when bank
competition is low. We then test this prediction empirically on a sample of
bank loans from 70 countries. We estimate logit models where the presence
of collateral is regressed on bank competition, measured by the Lerner
index. Our empirical tests corroborate the theoretical predictions that
bank competition reduces the use of collateral. These findings survive
several robustness checks.
Keywords: collateral; bank competition; asymmetric information; (follow links to similar papers)
JEL-Codes: D43; D82; G21; (follow links to similar papers)
37 pages, December 2, 2008
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