This paper analyses the determinants of the probability of default (PD) of bank loans. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank–borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988–2000) collected by the Bank of Spain's Credit Register (Central de Información de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank–borrower relationship increases the willingness to take more risk.

This paper examines the effect of organizational distance (i.e. distance between the headquarters of the bank that grants a loan and the location of the borrower) on the use of collateral for business loans by Spanish banks on the basis of the recent lender-based theory of collateral [Inderst, R., Mueller, H.M., 2007. A lender-based theory of collateral. Journal of Financial Economics 84, 826–859.]. We find that, for the average borrower, the use of collateral is higher for loans granted by local lenders than by distant ones. We also show that the difference in the likelihood of collateral in loans granted by local lenders, relative to distant lenders, is higher among older and larger firms, than, respectively, younger and smaller firms. We also find that banks use lending technologies that are different for near and for distant firms, in response to organizational diseconomies.