Weak Institutions and Credit Availability : The Impact of Crime on Bank Loans

This paper analyzes the relationship between the terms on bank loans and local crime rates, employing a sample of over 300,000 bank-firm relationships. Controlling for firm, market and bank characteristics the results show that where the crime rate is higher borrowers pay higher interest rates, pledge more collateral, and resort less to asset-backed loans and more to revolving credit lines than borrowers in low-crime areas. The evidence also suggests that access to credit is adversely affected by crime. The offenses that affect the loan market are those that exogenously increase firm fragility (extortion, organized crime) and raise loss given default (fraud, fraudulent bankruptcy)