No. 1352 - Collateral in bank lending during the financial crises: a borrower and a lender story

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by Massimiliano Affinito, Fabiana Sabatini and Massimiliano StacchiniOctober 2021

The literature documents that, during financial crises, stress on bank balance sheets can propagate to credit markets through a contraction in loans and higher interest rates. On the other hand, how stress influences the collateral to loan ratio in corporate lending has been scarcely investigated. This paper focuses on the period 2007-2013 to study the relationship between the collateral to loan ratio and the characteristics of firms and banks, and how the ratio evolves during a financial crisis.

The collateral to loan ratio is higher for firms with lower capitalization and a greater amount of past due loans; it further increased during the financial crisis, suggesting a tightening in lending policies. In terms of bank characteristics, the ratio is higher for banks that are more capitalized and have a lower burden of bad loans in their portfolios; this may reflect a more prudent positioning of sounder intermediaries on the risk/return frontier of lending activity.