The impact of the recent financial crisis on bank loan interest rates and guarantees.

Calcagnini, Giorgio and Farabullini, Fabio and Giombini, Germana (2012): The impact of the recent financial crisis on bank loan interest rates and guarantees.

Abstract

The paper analyzes the role of guarantees on loan interest rates before and during the recent financial crisis in Italian firm financing. The paper improves on existing literature by distinguishing between real and personal guarantees. Further, the paper investigates the potential different role of guarantees in the bank-borrower relationship during the recent financial crisis. This paper draws from individual Italian bank and firm data taken from the Banks’ Supervisory Reports to the Bank of Italy and the Central Credit Register over the period 2006-2009. Our analysis demonstrates that collateral affects the cost of credit of Italian firms by systematically reducing the interest rate of secured loans, while personal guarantees increase it. These effects are amplified during the crisis. Furthermore, guarantees are a more powerful instrument for ex-ante riskier borrowers than for safer borrowers. Indeed, riskier borrowers obtain significantly lower interest rates on secured loans than interest rate they would be charged on unsecured loans.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial crisis, guarantees, lending relationship
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

1) Albright J.J. and D. M. Marinova (2010). “Estimating Multilevel Models using SPSS, Stata, SAS, and R”. Mimeo.

2) Antweiler W. (2001). “Nested Random Effects Estimation in Unbalanced Panel Data.” Journal of Econometrics 101: 295-313.

3) Baltagi, B. H. (2002). Econometrics. New York: Springer.

4) Bank of Italy (2008). Annual Report. Rome.

5) Bank of Italy (2010). Statistical Bulletin 4/2010.

6) Berger A. N. & G. F. Udell (1990). “Collateral, Loan Quality, and Bank Risk.” Journal of Monetary Economics 25: 21-42.

7) Berger A. N. & G. F. Udell (1995). “Relationship Lending and Lines of Credit in Small Firms Finance.” Journal of Business 68 (3): 351-381.

8) Berger, A. N. & G. F. Udell (1998). “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle.” Journal of Banking & Finance 22: 613-673.

9) Berger, A. N. & G. F. Udell (2000). “Small Business and Debt Finance.” In: Zoltan, J. A and D. B. Audretsch (eds.), Handbook of Entrepreneurship.

10) Bester H. (1985). “Screening vs Rationing in Credit Markets with Imperfect Information”, American Economic Review, 57, 850-855.

11) Bester H. (1987). “The Role of Collateral in Credit Markets with Imperfect Information”, European Economic Review, 31, 887-899.

12) Bester H. (1994). “The Role of Collateral in a Model of Debt Renegotiation”, Journal of Money, Credit and Banking, 26, 72-86.

13) Besanko D. and A. V. Thakor (1987). “Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets”, International Economic Review, 28 (3), 671-689.

14) Bonaccorsi di Patti E. (2006). “La diffusione delle garanzie reali e personali nel credito alle imprese”, Bank of Italy.

15) Boot A. W. A. and A. V. Thakor (1994). “Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game”, International Economic Review, 35 (4), 899-920.

16) Boot A. W. A., A. V. Thakor and G. F. Udell (1991). “Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications, and Empirical Results”, Economic Journal, 101 (406), 458-472.

17) Calcagnini G., Farabullini F., and G. Giombini (2012). “Guarantees and bank loan interest rates in Italian small-sized firms.” In: G. Calcagnini and I. Favaretto C. (Edt) Small Businesses in the Aftermath of the Crisis. International Analyses and Policies, Series Contribution to Economics, Springer-Verlag (Berlin Heidelberg).

18) Casolaro, L., D. Focarelli and A. F. Pozzolo (2008). “The pricing effect of certification on syndicated loans”. Journal of Monetary Economics 5: 335-349.

19) Chakravarty S. and T. Yilmazer (2009). “A Multistage Model of Loans and the Role of Relationship”, Financial Management, 38 (4), 781-816.

20) Cowling M. (2010). “The role of guarantee schemes in alleviating credit rationing in the UK”. Journal of Financial Stability 6: 36-44.

21) Ebbes P., Bockenholt U. and M. Wedel (2004). “Regressor and random-effects dependencies in multilevel models”, Statistica Neerlandica, 58, 161-178.

22) Harhoff D. and T. Körting (1998). “Lending Relationships in Germany: Empirical Results from Survey Data”, Journal of Banking and Finance, 22, 1317-1353.

23) Hester D. D. (1967). “An Empirical Examination of a Commercial Bank Loan Offer Function”. In: Hester D.D. and J. Tobin (eds), Studies of Portfolio Behavior, 118-170. John Wiley & Sons, Inc. New York.

24) Jimenez, G., Salas V. and J. Saurina (2006). “Determinants of Collateral”, Journal of Financial Economics, 81, 255-281.

25) John K., Lynch A. W. and M. Puri (2003). “Credit Ratings, Collateral and Loan Characteristics: Implications for Yield”, Journal of Business, 76, 371-409.

26) Lewbel A. (1997). “Constructing instruments for regressions with measurement error when no additional data are available, with an application to patents and R&D”, Econometrica, 65, 1201-1213.

27) Manove M. and A. J. Padilla (1999). “Banking (conservatively) with optimists”, Rand Journal of Economics, 30(2), 324-350.

28) Manove M., Padilla A. J. and M. Pagano (2001). “Collateral versus Project Screening: A Model of Lazy Banks”, Rand Journal of Economics, 32(4), 726-744.

29) Ogawa K., Sterken E., and I. Tokutsu (2010). “Multiple Bank Relationship and the Main Bank System”. In: Calcagnini, G. and E. Saltari (eds.), The Economics of Imperfect Markets, series Contribution to Economics, 73-90. Physica-Verlag: Springer-Verlag Berlin Heidelberg.

30) Ono A. and I. Uesugi (2009). “The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan’s SME Loan Market”, Journal of Money, Credit, and Banking, 41 (5), 935-960.

31) Panetta F. & F. M. Signoretti (2010). “Domanda e Offerta di Credito in Italia durante la Crisi Finanziaria.” Occasional Papers, 63. Bank of Italy.

32) Petersen M. A. and R. G. Rajan (1994). “The Benefits of Lending Relationship: Evidence from Small Business Data”, Journal of Finance, 49(1), 3-37.

33) Pozzolo A. F. (2004). “The Role of Guarantees in Bank Lending.” Discussion Papers, 528. Bank of Italy.

34) Rabe-Hesketh S., Skrondal A. and A. Pickles (2004). “Generalized Multilevel Structural equation Modeling”, Psychometrika, 69(2), 167-190.

35) Spencer N. H. and A. Fielding (2000). “An instrumental variable consistent estimation procedure to overcome the problem of endogenous variables in multilevel models”, Multilevel modelling newsletters, 4-7.