Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 257: Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment
Geraldo Cerqueiro (), Steven Ongena () and Kasper Roszbach ()
Additional contact information
Geraldo Cerqueiro: Universidade Católica Portuguesa, Postal: Palma de Cima, 1649-023 Lisbon, Portugal
Steven Ongena: CentER - Tilburg University and CEPR, Department of Finance, Postal: Tilburg University, PO Box 90153, NL 5000 LE Tilburg, The Netherlands
Kasper Roszbach: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Abstract: We study a change in the Swedish law that exogenously reduced the value of all outstanding company mortgages, i.e., a type of collateral that is comparable to the floating lien. We explore this natural experiment to identify how collateral determines borrower quality, loan terms, access to credit and bank monitoring of business term loans. Using a differences-in-differences approach, we find that following the change in the law and the loss in collateral value borrowers pay a higher interest rate on their loans, receive a worse quality assessment by their bank, and experience a substantial reduction in the supply of credit by their bank. The reduction in collateral value also precedes a decrease in bank monitoring intensity and frequency of both the collateral and the borrower, consistent with models in which the pledging of risky assets incentivizes banks to monitor.
Keywords: Collateral; credit rationing; differences-in-differences; floating lien; loan contracts; monitoring; natural experiment
41 pages, February 1, 2012
Full text files
rap_wp257_120224.pdf
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