Published online by Cambridge University Press: 23 October 2023
We study the valuation of collateral by comparing spreads on loans by the same bank, to the same borrower, at the same origination date, but backed by different types of collateral. Pledging collateral reduces borrowing costs by 23 BPS on average. The effect varies across different types of collateral, with marketable securities being most valuable, and real estate and accounts receivables and inventory being more valuable than fixed assets and a blanket lien. Further, the rate reduction from pledging collateral is sensitive to the value of the underlying collateral, and collateral tends to be more valuable for smaller and private firms and for loans with longer maturity.
This article has been updated since its original publication. Please see DOI: https://doi.org/10.1017/S0022109023001357.
The authors thank an anonymous referee, Hendrik Bessembinder (the editor), Geraldo Cerqueiro, Natalie Cox, Olivier Darmouni, Matt Darst, Dan Greenwald, Kyle Herkenhoff, Yueran Ma, Stefan Nagel, Antoinette Schoar, David Sraer, Phil Strahan, Javier Suarez as well as seminar participants at the 2019 MIT Junior Finance Conference, 2020 EFA, Federal Reserve Bank of New York, European Central Bank, 2019 CESifo Area Conference on Macro, Money & International Finance, and the University of Hong Kong (HKU) for valuable comments. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of New York, or the Federal Reserve System.