The Valuation of Collateral in Bank Lending

Researchers' attempts to identify the valuation of collateral has been hampered by data limitations. We overcome this challenge by comparing spreads on loans originated by the same bank, to the same firm, at the same origination date, but with different types of collateral. We find that securing a loan reduces borrowing costs for firms by 17 basis points. The price effect varies across different types of collateral, with marketable securities and real estate being the most valuable types of collateral. Our results show that collateral is especially valuable for small and medium-sized firms, riskier firms, credit lines, and longer-term loans, thus adding support to the moral hazard-based theories of collateral. Further, we unveil supporting evidence for the microfoundation of the collateral channel: the value of and the propensity to pledge real estate collateral is sensitive to changes in local housing prices