Collateral, type of lender and relationship banking as determinants of credit risk

Abstract

This paper analyses the determinants of the probability of default (PD) of bank loans. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank-borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000) collected by the Bank of Spain's Credit Register (Central de Informaci on de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank-borrower relationship increases the willingness to take more risk.

Recovery Rates of Bank Loans: Empirical Evidence for Germany

“…61 This assumption is approved both by empirical analyses that detect a minor quality of the ratings of loans provided with collateral (see Orgler (1970), Hester (1979), Scott and Smith (1986)) and by those that verify a higher risk premium of collateralized loans (see Udell (1990, 1992), Booth (1992), Booth and Chua (1996), Angbazo et al (1998)). See Jiménez and Saurina (2004), p. 2194 per seq. 62 See Franks et al (2004).…”

“…62 See Franks et al (2004). 63 However, Jiménez and Saurina (2004) determine that for Spanish companies banks are more frequently willing to take higher credit risk if the business connection is intensive. In relation to the detected positive correlation between the creditworthiness and the recovery rate, this finding should lead to a lower recovery rate.…”

Relationship Lending and Credit Quality

“…Foglia et al (1998) show that multiple lending practices is associated with a higher riskiness of the firm, supporting the hypothesis that when a large number of lenders are involved, monitoring of the borrower tends to be weaker and to encourage its fragility. Focusing on Spain, Jimenez and Saurina (2004) find that collateralized loans have a higher probability to fail and that an intense bank-borrower relationship increases the willingness to take more risk. Carmignani and Omiccioli (2007) show that high concentration of bank credit reduces the likelihood of financial distress and liquidation, as predicted by the literature on relationship banking.…”

“…Our empirical approach is borrowed from (Jimenez and Saurina, 2004) Relationship variables include the number of lenders for each firm (#BANK), the duration lender-borrower relationship (LENGTH), the distance between the headquarter and the lender and the location of the credit office where the firm holds the relationship (DISTANCE). Loan contract terms variables include the bank-firm credit granted and credit used and the presence of collateralized loans.…”

“…All these papers focus on periods before the crisis. Regarding the empirical strategy adopted, some papers (Elsas and Krahnen, 2000;Elsas 2005) use credit-file data and other papers (Carmignani and Omiccioli, 2007;Jimenez and Saurina, 2004) focus on industry survey studies conducted exclusively with data collected by the national credit register (specifically, these studies analyze the credit information between each firm within the entire bank system). While the latter approach has the unquestionable value of extending the results at bank system level, it fails to capture some characteristics of bankfirm relationship (e.g.…”