The Role of Collateral in Borrowing

Abstract

This paper studies the role of collateral in credit markets under stress. Australian interbank markets at the time of the Lehman Brothers failure present a platform for identification, because the collateral is liquid and homogenous across borrowers (unlike in retail credit markets), the shock is large and exogenous (unlike in countries with bank failures), and there is comprehensive administrative collateralised and uncollateralised loan-level data. After the exogenous shock, collateralised and uncollateralised borrowing compositions diverge. Uncollateralised borrowing declines for <i>ex ante</i> riskier borrowers while collateralised borrowing increases for borrowers <i>ex ante</i> holding more high-quality collateral. Moreover, riskier banks with sufficient high-quality collateral substitute from uncollateralised to collateralised borrowing. In aggregate, collateralised borrowing expands substantially, predominantly collateralised against second-best (but still high quality) collateral, while interest rates on loans against first-best collateral fall substantially, indicating scarcity of the most-liquid safe assets. This liquid asset demand encourages collateralised lending, contrary to cash hoarding.

The Influence of Collateral Availability on Access to Credit by Small and Medium Enterprises (SMEs) in Meru County

“…This implies that even though some SMEs are required to provide security prior to accessing to credit, over 42 % of SMEs are not required to provide security before accessing credit. This could be related to Garvin et al (2021) study finding that uuncollateralised borrowing declines for ex ante riskier borrowers while collateralised borrowing increases for borrowers ex ante holding more high quality collateral. Thus, security is not a significant prerequisite for accessing credit.…”

The Necessity of Using Collateral in the Credit Market and Its Foreign Experience

“…N.Garvin, D.Hughes, J.Peydroning ta'kidlashicha, "garov ta'minotining kreditga ta'sirini aniq hisob-kitob qilish qiyin, chunki chakana kredit bozorlari qarz oluvchilarning boshqa xususiyatlari bilan o'zaro bog'liq bo'lgan likvidsiz garov ta'minotlariga egalik qilishi mumkin" [4].…”