Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment
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Abstract
| We identify the value of collateralization and its impact on borrower quality and bank monitoring exploiting a change in the Swedish law as a unique natural experiment that exogenously reduced the value of company mortgages, a special type of collateral comparable to the chattel pledge in the United States. Using a differences-in-differences approach, we study the impact on the entire business loan portfolio of a major Swedish bank. We find that collateral is valuable for the bank and that following a loss in collateral value the bank charges a higher interest rate on the loan, worsens its quality assessment of the borrower but also reduces its monitoring efforts of collateral and borrower. |
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| Viorel Roscovan |
