Collateral, loan quality and bank risk

Financial Frictions and the Role of Investment Specific Technology Shocks in the Business Cycle

“…Furthermore, empirical evidence indicates that collateralization of debt is ubiquitous (see for example Berger and Udell 1990, Harhoff and Korting 1998and Jimenez et al 2006; collateral requirements are consistent with the notion that entrepreneurs' borrowing capacity is constrained by the value of (such as Justiniano et al 2011) make a distinction between IST shocks, which affect the transformation of consumption goods into investment, and shocks to the marginal efficiency of investment (MEI shocks), which affect the transformation of investment into productive capital.…”

Collateral and the Limits of Debt Capacity: Theory and Evidence

“…In equilibrium, both high quality and low quality firms pledge, but in very different ways: high quality firms pledge to maintain a lower degree of leverage in order to keep available collateral capacity, and low quality firms pledge by offering more collateral. This helps to explain the seemingly surprising results in Berger and Udell (1990) and John, Lynch, and Puri (2003), who find that interest rate increases with collateral. In contrast, Benmelech and Bergman (2009) show that, conditioning on the firm pledging collateral, better collateral carries lower interest rate, which is in line with our theory.…”

“…Rather, unsecured debt together with committed equity represents a different pledge of firm resources (commitment collateral as well as real collateral), where measurement of commitment collateral have generally been ignored in the empirical literature. Our approach thus resurrects asymmetric information as an explanation as to why higher credit risks tend to be associated with secured debt issuances in the data (Berger and Udell (1990)). …”

“…When lenders have limited ability to enforce repayment, pledging collateral is indispensable to ameliorate credit market frictions. Berger and Udell (1990), and Harhoff and Korting (1998), for example, find that nearly 70 per cent of commercial and industrial loans in the largest western economies are secured. Collateral also has important effects on the real economy.…”

Patent Activity of Start-Ups and the Structuring of Venture Lending Contracts

“…However, debt financing is strongly dependent on tangible assets or positive cash flows as securities, which the companies have to provide in order to get debt capital (Berger & Udell, 1990;Cumming & Fleming, 2013). Young and highly innovative firms often do not have tangible assets or positive cash flows to provide as security (Achleitner, Braun, & Kohn, 2011;Berger & Udell, 1998;Cosh et al, 2009).…”