Collateral in Bank Lending During the Financial Crises : A Borrower and a Lender Story

We analyse whether and to what extent both firm and bank soundness are associated with the use of collateral in bank lending, and whether these relationships changed during the global financial crisis and the euro-area sovereign debt crisis. By using a large dataset of 2 million observations at bank and firm level covering the years 2007-13, we find that the degree of collateralization is higher for firms that are financially stressed and have low capitalization and that it increases further for these borrowers during downturns. In addition, we find that collateral policies are tighter at sounder banks, that is, at banks that are more capitalized and have a lower burden of bad loans. This result is consistent with the existence of a negative link between bank soundness and risk-taking in bank lending