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Pledgeability and bank lending technology

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  • Dieler, Tobias
  • Zhai, Wei

Abstract

What is the effect of an expansion of eligible collateral on different lending technologies? We show that expanding eligible collateral (i) increases transactional (T) banks’ interest income and decreases relationship (R) banks’ interest income, (ii) increases average loan volume more for T- than for R-banks, (iii) decreases average loan risk and (iv) decreases T-banks’ non-interest income while it increases R-banks’ non-interest income. (v) In sum, T-banks’ profitability increases and R-bank’s profitability remains unaffected. Expanding the set of collateral from immovable to movable assets typically benefits SMEs because it allows them to obtain secured loans instead of unsecured ones. A-priori, it is unclear whether SMEs will continue borrowing from R-banks or switch to T-banks. R-banks benefit from customer relationships and T-banks have the collateral screening technology in place. We show that competition between T- and R-banks gives T-banks a comparative advantage, but R-banks can substitute lost interest income with non-interest income.

Suggested Citation

  • Dieler, Tobias & Zhai, Wei, 2024. "Pledgeability and bank lending technology," Journal of Corporate Finance, Elsevier, vol. 88(C).
  • Handle: RePEc:eee:corfin:v:88:y:2024:i:c:s0929119924001123
    DOI: 10.1016/j.jcorpfin.2024.102650
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    More about this item

    Keywords

    Collateral; Lending technology; Transactional bank; Relationship bank;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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