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Collateralization, bank loan rates, and monitoring


Ongena, Steven; Cerqueiro, Geraldo; Roszbach, Kasper (2016). Collateralization, bank loan rates, and monitoring. Journal of Finance, 71(3):1295-1322.

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.

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.

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2 citations in Web of Science®
2 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2016
Deposited On:06 Jan 2015 15:02
Last Modified:12 May 2016 01:00
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:0022-1082
Publisher DOI:https://doi.org/10.1111/jofi.12214
Related URLs:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908097## (Organisation)
Other Identification Number:merlin-id:9198

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