Journal of Finance Vol. 71 No. 3 2016

Collateralization, Bank Loan Rates, and Monitoring

Geraldo Cerqueiro¹; Steven Ongena²; Kasper Roszbach^3,4,5,6,7

¹ University of Zurich · ² Universidade Católica Portuguesa · ³ Swedish National Bank · ⁴ University of Groningen · ⁵ Banque de France · ⁶ American Finance Association · ⁷ International Institute for Strategic Studies

Abstract

We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique data set from a large bank containing timely assessments of collateral values, we find that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims. We thus explain why banks are senior lenders and quantify the value of claimant priority.

DOI

10.1111/jofi.12214

Volume

71

Issue

3

Pages

1295-1322

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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