Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-27T11:29:14.500Z Has data issue: false hasContentIssue false
  • English
  • Français

The Valuation of Collateral in Bank Lending

Published online by Cambridge University Press:  23 October 2023

Stephan Luck  and
João A. C. Santos
Stephan Luck*
Affiliation:
Federal Reserve Bank of New York
João A. C. Santos
Affiliation:
Federal Reserve Bank of New York and Nova School of Business and Economics [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We study the valuation of collateral by comparing spreads on loans by the same bank, to the same borrower, at the same origination date, but backed by different types of collateral. Pledging collateral reduces borrowing costs by 23 BPS on average. The effect varies across different types of collateral, with marketable securities being most valuable, and real estate and accounts receivables and inventory being more valuable than fixed assets and a blanket lien. Further, the rate reduction from pledging collateral is sensitive to the value of the underlying collateral, and collateral tends to be more valuable for smaller and private firms and for loans with longer maturity.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 5 , August 2024 , pp. 2038 - 2067
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

This article has been updated since its original publication. Please see DOI: https://doi.org/10.1017/S0022109023001357.

The authors thank an anonymous referee, Hendrik Bessembinder (the editor), Geraldo Cerqueiro, Natalie Cox, Olivier Darmouni, Matt Darst, Dan Greenwald, Kyle Herkenhoff, Yueran Ma, Stefan Nagel, Antoinette Schoar, David Sraer, Phil Strahan, Javier Suarez as well as seminar participants at the 2019 MIT Junior Finance Conference, 2020 EFA, Federal Reserve Bank of New York, European Central Bank, 2019 CESifo Area Conference on Macro, Money & International Finance, and the University of Hong Kong (HKU) for valuable comments. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of New York, or the Federal Reserve System.

References

Altman, E. I., and Kalotay, E. A.. “Ultimate Recovery Mixtures.” Journal of Banking & Finance, 40 (2014), 116–129.10.1016/j.jbankfin.2013.11.021CrossRefGoogle Scholar
Bahaj, S.; Foulis, A.; and Pinter, G.. “Home Values and Firm Behavior.” American Economic Review, 110 (2020), 2225–2270.Google Scholar
Benmelech, E. “Asset Salability and Debt Maturity: Evidence from Nineteenth-Century American Railroads.” Review of Financial Studies, 22 (2008), 1545–1584.10.1093/rfs/hhn036CrossRefGoogle Scholar
Benmelech, E., and Bergman, N.. “Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from US Airlines.” Quarterly Journal of Economics, 123 (2008), 1635–1677.10.1162/qjec.2008.123.4.1635CrossRefGoogle Scholar
Benmelech, E., and Bergman, N. K.. “Collateral Pricing.” Journal of Financial Economics, 91 (2009), 339–360.10.1016/j.jfineco.2008.03.003CrossRefGoogle Scholar
Benmelech, E.; Garmaise, M.; and Moskowitz, M.. “Do Liquidation Values affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation.” Quarterly Journal of Economics, 120 (2005), 1121–1154.Google Scholar
Benmelech, E.; Kumar, N.; and Rajan, R.. “The Secured Credit Premium and the Issuance of Secured Debt.” Journal of Financial Economics, 146 (2022), 143–171.Google Scholar
Berger, A.; Frame, S. W.; and Ioannidou, V.. “Tests of Ex Ante Versus Ex Post Theories of Collateral Using Private and Public Information.” Journal of Financial Economics, 100 (2011), 85–97.10.1016/j.jfineco.2010.10.014CrossRefGoogle Scholar
Berger, A. N.; Frame, W. S.; and Ioannidou, V.. “Reexamining the Empirical Relation Between Loan Risk and Collateral: The Roles of Collateral Liquidity and Types.” Journal of Financial Intermediation, 26 (2016), 28–46.10.1016/j.jfi.2015.11.002CrossRefGoogle Scholar
Berger, A. N., and Udell, G. F.. “Collateral, Loan Quality and Bank Risk.” Journal of Monetary Economics, 25 (1990), 21–42.10.1016/0304-3932(90)90042-3CrossRefGoogle Scholar
Berger, A. N., and Udell, G. F.. “Relationship Lending and Lines of Credit in Small Firm Finance.” Journal of Business, 68 (1995), 351–381.10.1086/296668CrossRefGoogle Scholar
Bernanke, B., and Gertler, M.. “Agency Costs, Net Worth, and Business Fluctuations.” American Economic Review, 79 (1989), 14–31.Google Scholar
Besanko, D., and Thakor, A. V.. “Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets.” International Economic Review, 28 (1987a), 671–689.10.2307/2526573CrossRefGoogle Scholar
Besanko, D., and Thakor, A. V.. “Competitive Equilibrium in the Credit Market Under Asymmetric Information.” Journal of Economic Theory, 42 (1987b), 167–182.10.1016/0022-0531(87)90108-6CrossRefGoogle Scholar
Bester, H. “Screening vs. Rationing in Credit Markets with Imperfect Information.” American Economic Review, 75 (1985), 850–855.Google Scholar
Beyhaghi, M. “Third-Party Credit Guarantees and the Cost of Debt: Evidence from Corporate Loans.” Review of Finance, 26 (2022), 287–317.Google Scholar
Boot, A. W. “Relationship Banking: What Do We Know?” Journal of Financial Intermediation, 9 (2000), 7–25.10.1006/jfin.2000.0282CrossRefGoogle Scholar
Boot, A.; Thakor, A. V.; and Udell, G. F.. “Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results.” Economic Journal, 101 (1991), 458–472.10.2307/2233552CrossRefGoogle Scholar
Booth, J. R., and Booth, L. C.. “Loan Collateral Decisions and Corporate Borrowing Costs.” Journal of Money, Credit and Banking, 38 (2006), 67–90.10.1353/mcb.2006.0011CrossRefGoogle Scholar
Bradley, M., and Roberts, M.. “The Structure and Pricing of Corporate Debt Covenants.” Quarterly Journal of Finance, 5 (2015), 1–37.10.1142/S2010139215500019CrossRefGoogle Scholar
Brunnermeier, M. K., and Sannikov, Y.. “A Macroeconomic Model with a Financial Sector.” American Economic Review, 104 (2014), 379–421.10.1257/aer.104.2.379CrossRefGoogle Scholar
Caglio, C. R.; Darst, R. M.; and Kalemli-Özcan, E.. “Risk-Taking and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms.” NBER Working Paper No. 28685 (2021).10.2139/ssrn.3829383CrossRefGoogle Scholar
Campello, M.; Connolly, R.; Kankanhalli, G.; and Steiner, E.. “Do Real Estate Values Boost Corporate Borrowing? Evidence from Contract-Level Data.” Journal of Financial Economics, 144 (2022), 611–644.Google Scholar
Carey, M. S., and Gordy, M. B.. “The Bank as Grim Reaper: Debt Composition and Bankruptcy Thresholds.” Finance and Economics Discussion Series 2016-069, Board of Governors of the Federal Reserve System (U.S.) (2016).10.17016/FEDS.2016.069CrossRefGoogle Scholar
Cerqueiro, G.; Ongena, S.; and Roszbach, K.. “Collateralization, Bank Loan Rates, and Monitoring.” Journal of Finance, 71 (2016), 1295–1322.10.1111/jofi.12214CrossRefGoogle Scholar
Cerqueiro, G.; Ongena, S.; and Roszbach, K.. “Collateral Damaged? Priority Structure, Credit Supply, and Firm Performance.” Journal of Financial Intermediation, 44 (2020), 100,824.10.1016/j.jfi.2019.05.001CrossRefGoogle Scholar
Chan, Y.-S., and Kanatas, G.. “Asymmetric Valuations and the Role of Collateral in Loan Agreements.” Journal of Money, Credit and Banking, 17 (1985), 84–95.10.2307/1992508CrossRefGoogle Scholar
Chan, Y.-S., and Thakor, A. V.. “Collateral and Competitive Equilibria with Moral Hazard and Private Information.” Journal of Finance, 42 (1987), 345–363.10.1111/j.1540-6261.1987.tb02571.xCrossRefGoogle Scholar
Chaney, T.; Sraer, D.; and Thesmar, D.. “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment.” American Economic Review, 102 (2012), 2381–2409.10.1257/aer.102.6.2381CrossRefGoogle Scholar
Chodorow-Reich, G.; Darmouni, O.; Luck, S.; and Plosser, M.. “Bank Liquidity Across the Firm Size Distribution.” NBER Working Paper No. 27945 (2021).10.3386/w27945CrossRefGoogle Scholar
Cvijanović, D. “Real Estate Prices and Firm Capital Structure.” Review of Financial Studies, 27 (2014), 2690–2735.10.1093/rfs/hhu035CrossRefGoogle Scholar
Davydenko, S. A., and Franks, J. R.. “Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.” Journal of Finance, 63 (2008), 565–608.10.1111/j.1540-6261.2008.01325.xCrossRefGoogle Scholar
Degryse, H.; Ioannidou, V.; Liberti, J. M.; and Sturgess, J.. “When Do Laws and Institutions Affect Recovery Rates on Collateral?” Review of Corporate Finance Studies, 9 (2020), 1–43.10.1093/rcfs/cfz011CrossRefGoogle Scholar
Gan, J. “Collateral, Debt Capacity, and Corporate Investment: Evidence from a Natural Experiment.” Journal of Financial Economics, 85 (2007), 709–734.10.1016/j.jfineco.2006.06.007CrossRefGoogle Scholar
Giovanni, J. D.; Kalemli-Ozcan, S.; Ulu, M. F.; and Baskaya, Y. S.. “International Spillovers and Local Credit Cycles.” Review of Economic Studies, 89 (2021), 733–773.10.1093/restud/rdab044CrossRefGoogle Scholar
Gopal, M. “How Collateral Affects Small Business Lending: The Role of Lender Specialization.” Working Paper, Georgia Institute of Technology (available at https://www2.census.gov/ces/wp/2021/CES-WP-21-22.pdf) (2021).Google Scholar
Gorton, G., and Kahn, J.. “The Design of Bank Loan Contracts.” Review of Financial Studies, 13 (2000), 331–364.10.1093/rfs/13.2.331CrossRefGoogle Scholar
Greenwald, D.; Krainer, J.; and Paul, P.. “The Credit Line Channel” (2020).10.24148/wp2020-26CrossRefGoogle Scholar
Hester, D. D. “Customer Relationships and Terms of Loans: Evidence from a Pilot Survey: A Note.” Journal of Money, Credit and Banking, 11 (1979), 349–357.10.2307/1991796CrossRefGoogle Scholar
Ioannidou, V.; Pavanini, N.; and Peng, Y.. “Collateral and Asymmetric Information in Lending Markets.” Journal of Financial Economics, 144 (2022), 93–121.10.1016/j.jfineco.2021.12.010CrossRefGoogle Scholar
Jiménez, G.; Salas, V.; and Saurina, J.. “Determinants of Collateral.” Journal of Financial Economics, 81 (2006), 255–281.10.1016/j.jfineco.2005.06.003CrossRefGoogle Scholar
John, K.; Lynch, A. W.; and Puri, M.. “Credit Ratings, Collateral, and Loan Characteristics: Implications for Yield.” Journal of Business, 76 (2003), 371–410.10.1086/375252CrossRefGoogle Scholar
Kiyotaki, N., and Moore, J.. “Credit Cycles.” Journal of Political Economy, 105 (1997), 211–248.10.1086/262072CrossRefGoogle Scholar
Lian, C., and Ma, Y.. “Anatomy of Corporate Borrowing Constraints.” Quarterly Journal of Economics, 136 (2021), 229–291.Google Scholar
Lin, L. “Collateral and the Choice Between Bank Debt and Public Debt.” Management Science, 62 (2016), 111–127.10.1287/mnsc.2014.2094CrossRefGoogle Scholar
Longhofer, S. D., and Santos, J. A.. “The Paradox of Priority.” Financial Management, 32 (2003), 69–81.10.2307/3666204CrossRefGoogle Scholar
Nikolov, B.; Schmid, L.; and Steri, R.. “Dynamic Corporate Liquidity.” Journal of Financial Economics, 132 (2018), 76–102.10.1016/j.jfineco.2017.06.018CrossRefGoogle Scholar
Ortiz-Molina, H., and Penas, M. F.. “Lending to Small Businesses: The Role of Loan Maturity in Addressing Information Problems.” Small Business Economics, 30 (2008), 361–383.10.1007/s11187-007-9053-2CrossRefGoogle Scholar
Rajan, R. G. “Insiders and Outsiders: The Choice Between Informed and Arm’s-Length Debt.” Journal of Finance, 47 (1992), 1367–1400.Google Scholar
Rajan, R., and Winton, A.. “Covenants and Collateral as Incentives to Monitor.” Journal of Finance, 50 (1995), 1113–1146.10.1111/j.1540-6261.1995.tb04052.xCrossRefGoogle Scholar
Santos, J. A. C. “Bank Corporate Loan Pricing Following the Subprime Crisis.” Review of Financial Studies, 24 (2011), 1916–1943.10.1093/rfs/hhq115CrossRefGoogle Scholar
Santos, J. A. C., and Winton, A.. “Bank Loans, Bonds, and Information Monopolies Across the Business Cycle.” Journal of Finance, 63 (2008), 1315–1359.10.1111/j.1540-6261.2008.01359.xCrossRefGoogle Scholar
Santos, J. A. C., and Winton, A.. “Bank Capital, Borrower Power, and Loan Rates.” Review of Financial Studies, 32 (2019), 4501–4541.10.1093/rfs/hhz001CrossRefGoogle Scholar
Schwert, M. “Does Borrowing from Banks Cost More than Borrowing from the Market?” Journal of Finance, 75 (2020), 905–947.10.1111/jofi.12849CrossRefGoogle Scholar
Sharpe, S. A. “Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships.” Journal of Finance, 45 (1990), 1069–1087.Google Scholar
Stiglitz, J. E., and Weiss, A.. “Credit Rationing in Markets with Imperfect Information.” American Economic Review, 71 (1981), 393–410.Google Scholar
Strahan, P. “Borrower Risk and the Price and Nonprice Terms of Bank Loans.” Staff Reports, Federal Reserve Bank of New York (1999).10.2139/ssrn.192769CrossRefGoogle Scholar
Stulz, R., and Johnson, H.. “An Analysis of Secured Debt.” Journal of Financial Economics, 14 (1985), 501–521.10.1016/0304-405X(85)90024-8CrossRefGoogle Scholar
Tirole, J. The Theory of Corporate Finance. Princeton, NJ: Princeton University Press (2005).Google Scholar