The Valuation of Collateral in Bank Lending

50 Pages Posted: 20 Oct 2019 Last revised: 26 Apr 2022

See all articles by Stephan Luck

Stephan Luck

Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Date Written: October 10, 2019

Abstract

We identify 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 basis points 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, we show that collateral is most valuable for riskier and smaller firms and loan prices fall with loan maturity and are sensitive to collateral values.

Keywords: collateral, collateral pricing, bank lending, macro-finance

JEL Classification: G1, G2, G21, G30, G32, G33, E44

Suggested Citation

Luck, Stephan and Santos, João A. C., The Valuation of Collateral in Bank Lending (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3467316 or http://dx.doi.org/10.2139/ssrn.3467316

Stephan Luck (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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