Loans, Interest Rates and Guarantees: Is There a Link? 1

Transcription

1 Loans, Ineres Raes and Guaranees: Is There a Link? 1 G. Calcagnini, F. Farabullini e G. Giombini 1. Inroducion This paper aims a shedding ligh on he influence of guaranees on he loan pricing (banking ineres raes), by focusing on hree differen ypes of cusomers: firms, producer households and consumer households. The relevance of guaranees in lending aciviy is widespread acknowledged, and heir role is recognized in he New Basel Capial Accord (Basel II) ha foresees a specific regulaion for secured loans. While he exisence of a posiive relaionship beween ineres raes and he riskiness of borrowers (in his paper approximaed by bad loans) is well esablished in he lieraure, he role of guaranees is less clear. Economiss insinc and convenional wisdom in he banking communiy would suppor he idea ha secured loans are less risky and, herefore, should carry lower ineres raes. However, some papers find an unexpeced posiive relaionship beween ineres raes and guaranees (see, for example, Barro, 1976, Berger and Udell, 1990): This resul has wo major implicaions: ha secured loans are ypically made o borrowers considered ex-ane riskier by banks, and ha he presence of warranies is insufficien o offse such higher credi-risk (Pozzolo, 2004). The higher ineres raes applied o loans backed by guaranees may also be due o he effecs of asymmeric informaion. On he one hand, banks migh ask for guaranees when hey need o disinguish ex-ane he risk of differen ypes of borrowers (adverse selecion). Alernaively, banks may use guaranees as an incenive mechanism o reduce he possibiliy of opporunisic behavior of borrowers afer he ransacion occurred (moral hazard). I is imporan o disinguish beween real and personal guaranees. Personal guaranees are conracual obligaions of a hird pary, and hey ac as if hey were exernal collaeral. However, hey do no give he lender a specific claim on paricular asses, and change he acions he could ake in he case of he borrower s bankrupcy. Consequenly, only empirical analysis may help 1 We hank M. Casa and G. Cau for providing us wih valuable daa. Universià di Urbino Carlo Bo Banca d'ialia, S. Sudi

2 disinguish which of he wo ypes of guaranees (real and personal) has a sronger impac on he loan ineres rae. 2 In his paper, we aim a analysing wheher: he convenional wisdom ha secured loans are less risky (and, hus, hey carry lower ineres raes) is suppored by empirical evidence. We will also look a he differenial effec of real and personal guaranees on ineres raes; collaeral reduces he screening aciviy of banks and increases he risk of moral hazard. This lazy behaviour may affec allocaion of funds in favour of projecs ha have lower reurns. 3 Our work is in he same line as Pozzolo s (2004). However, while Pozzolo mainly focuses on he relaionship beween guaranees and he likelihood of obaining loans, our paper sudies he relaionship beween bank ineres raes and guaranees. Our analysis refers o he Ialian credi marke and uses aggregaed and individual saisics drawn from he ESCB (European Sysem of Cenral Banks) harmonized daa, he Prudenial Saisical Reurn, and he Cenral Credi Regiser. Our main resuls is ha he role played by guaranees in seing ineres raes differs according o he ype and size of borrowers. In he case of firms, more collaeral means higher ineres raes in he case of small-sized firms and lower ineres raes in he case of larger firms, respecively; he role of guaranees signals ha he screening aciviy is no lazy. As for consumer households, resuls are unclear; hey are affeced by he large share of real-esae loans, which have o be assised by collaeral, according o Ialian law. As regards producer households, individual daa a bank and firm level show ha boh real and personal guaranees help o solve adverse selecion problems, while he personal wealh of enrepreneurs miigae moral hazard problems. The paper is organized as follows. Secion 2 reviews he economic lieraure on guaranees and bank ineres raes, while Secion 3 describes daa used and provides some descripive saisics; Secion 4 repors economeric exercises and discusses resuls. Finally, Secion 5 summarizes he findings. 2. A review of he lieraure 2 As for he disincion beween inside collaeral and ouside collaeral, inside collaeral is physical asses owned by he borrower, and i is mainly used o order crediors prioriy in he case of defaul. Ouside collaeral is asses posed by exernal granors, and i increases he poenial loss of he borrower in he case of bankrupcy. Therefore, he relaionship beween risk and guaranees should be sronger in he case of ouside collaeral, given ha inside collaeral does no provide addiional losses o he borrower if he defauls. However, given he lack of deailed informaion on inside and ouside collaeral, his paper does no disinguish beween differen ypes of collaeral. 3 Here, and in he res of he paper, we name a bank lazy if, as in Manove, Padilla, and Pagano (2001), a bank may volunarily choose loan conracs ha specify a high level of posed collaeral wihou screening projecs, even hough he laer would efficien. 2

3 In counries like Ialy, whose economy is largely dominaed by small companies, he provision of real and personal guaranees has always played a major role in faciliaing he flow of credi o borrowers. The role of collaeral and guaranees in lending relaionship has been widely discussed, and differen conclusions have been reached. Under perfec informaion, he bank can disinguish beween differen ypes of borrowers, has perfec knowledge abou he riskiness of heir invesmen projecs, herefore here is no need for guaranees. Under asymmeric informaion, however, collaeral and personal guaranees play a role in solving differen problems ha may arise (Ono and Uesug 2006). Firs of all, here are problems linked o he riskiness of he borrower. A hidden informaionadverse selecion problem arises in siuaions in which banks canno discern he ex-ane riskiness of he enrepreneur. Wihou guaranees, he average loan rae would be higher han he rae ha is opimal for safe borrowers, and only riskier borrowers would apply for banks loans. In hese siuaions collaeral and personal guaranees ac as a screening device o disinguish he ex-ane riskiness of he enrepreneur, and lower risk borrowers will choose he conrac wih guaranees in order o ake advanage of he lower ineres rae (Beser, 1985 and 1987). 4 A hidden acion-moral hazard problem arises when banks canno observe he borrower s behaviour afer he loan is graned. In hese siuaions guaranees are used as an incenive device, and reduce he debor incenive o sraegically defaul. As Boo e al. (1991) showed, if here is subsiuabiliy beween he borrower qualiy and acion, i.e. bad applicans have a higher reurn from effor, he bank requires o pledge more guaranees in order o limi moral hazard problems. Moreover, here are sudies ha analyze he associaion beween he lengh of he bankborrower relaionship and guaranees requiremens in boh adverse selecion and moral hazard seings. Among ohers, Boo and Thakor (1994) analyzed repeaed moral hazard in a compeiive credi marke. They found ha a long erm banking relaionship benefis he borrowers: borrowers pay higher ineres raes and pledge guaranees early in he relaionship, bu, once heir firs projec is successful, hey are rewarded wih unsecured loans and lower loan raes. In a principal-agen seing, John e al. (2003) find ha guaranees decrease he riskiness of a given loan, and ha collaeralized deb has higher yield han general deb, afer conrolling for credi raioning. 4 However, in he presence of deb renegoiaion, renegoiaion migh undermine he laer role of collaeral as a screening device in he sense ha if collaeralizaion becomes aracive also for high risk enrepreneurs, he low risk enrepreneurs can no longer disinguish hemselves by posing collaeral (Beser, 1994). 3

4 Guaranees influence he screening and monioring aciviies of banks. Given he role of banks as informaion providers, differen resuls are found in he economic lieraure on he impac of collaeral and personal guaranees on bank s screening and monioring aciviies. According o he lazy bank hypohesis (Manove, Padilla, and Pagano, 2001), he presence of a high level of guaranees weakens he bank s incenive o evaluae he profiabiliy of a planned invesmen projec. In his case guaranees and screening are subsiues for bank s monioring, bu hey are no equivalen from a social sandpoin. Indeed, he auhors find ha puing an upper bound on he amoun of guaranees relaive o he projec value is efficien in compeiive credi markes. Rajan and Winon (1995), on he oher hand, argue ha a high level of collaeralizaion migh be considered as a sign ha he borrower is no sound, given ha he bank usually has a greaer incenive o ask for guaranees when he borrowers prospecs are poor. Therefore, he monioring aciviy should be higher in he presence of higher deb securiizaion. Longhofer and Sanos (2000) argue ha guaranees and monioring are complemens when banks ake senior posiions on heir small business loans. Collaeral and personal guaranees requiremens migh be affeced by credi marke compeiion. Besanko and Thakor (1987) analyze he role of credi marke srucures in he presence of asymmeric informaion. The auhors find ha in a compeiive marke guaranees are useful in solving adverse selecion problems: low-risk borrowers choose a conrac wih a high level of guaranees and a low loan rae, whereas high-risk borrowers choose a conrac wih a low level of guaranees and a high loan rae. In a monopolisic seing, however, collaeral and personal guaranees play no role unless heir value is high enough o make he loan riskless for banks. Inders and Mueller (2006) discuss a model wih differen ypes of lenders: local lenders, who have sof and non conracable informaion advanages, and ransacion lenders (lenders locaed ouside local markes). They show ha local lenders should reduce he loan rae and increase guaranees requiremens o mainain heir compeiive advanage, unil he informaion advanage narrows and he compeiive pressure from ransacion lenders increases. Theoreical models on he relaionship beween guaranees and compeiion predic a posiive correlaion beween bank compeiion and guaranees requiremens. Similarly he empirical analysis of Jiménez, Salas-Fumás and Saurina (2006) find ha he use of collaeral is less likely in more concenraed markes. Peersen and Rajan (1995) analyze he effec of credi marke compeiion on lending relaionship and find ha firms in he mos concenraed credi markes are he leas credi raioned, and ha banks in more concenraed markes charge lower han compeiive ineres raes on young firms, and higher han compeiive ineres raes on older firms. Empirical resuls on he impac of collaeral and personal guaranees on he loan rae are no homogeneous eiher. Indeed, on 4

5 he one hand, here should be a negaive correlaion beween guaranees and he risk premium if collaeral and personal guaranees are used as a screening device o solve he adverse selecion problem. On he oher hand, he correlaion should be posiive if guaranees are used as an incenive device o reduce moral hazard, and he ex-ane risk of he borrower is observed. Berger and Udell (1990) find ha guaranees are mos ofen associaed wih riskier borrowers, riskier loans, and riskier banks, supporing he idea ha observably riskier borrowers are asked o pledge more guaranees o miigae he moral hazard problem. Ono and Uesugi (2006), who analyze he small business loan marke in Japan, reach similar resuls. They find ha guaranees are more likely o be pledged by riskier borrowers. Pozzolo (2004) argues ha, when esing he relaionship beween risk and collaeralizaion, i is imporan o disinguish beween inside collaeral and ouside collaeral, and beween real and personal guaranees. He finds ha real guaranees are no saisically relaed o he borrower risk. He inerpres his finding as poenially consisen wih he hypohesis ha inside collaeral is used as a screening device o solve he adverse selecion problem. On he oher hand, he finds ha personal guaranees are more likely o be requesed when he borrower is ex-ane riskier. However, once he borrower s riskiness is conrolled for, boh real and personal guaranees reduce he ineres rae charged on loans. Jiménez, Salas-Fumás and Saurina (2006) find direc evidence of a negaive associaion beween collaeral and he borrower s risk. Some auhors invesigae he influence of oher variables on he probabiliy ha guaranees will be requesed. Berger and Udell (1995) and Jiménez, Salas-Fumás and Saurina (2006) find ha borrowers wih longer banking relaionships pay lower ineres raes and are less likely o pledge guaranees. More specifically, Berger and Udell (1995) find, ha he older a firm is and he longer is banking relaionship, he less ofen he firm will pledge guaranees. This resul is seen as consisen wih he idea ha requiring guaranees early in a relaionship may be useful in solving moral hazard siuaions. Berger and Udell (1995) also find a posiive relaionship beween he oal asses value of he borrowing firms, which is a measure of firm size, and he probabiliy o ge a loan ha has o be assised by guaranees. As for he effecs of guaranees on screening and monioring aciviies of banks, empirical implicaions of he above heoreical models are mixed. According o he lazy bank hypohesis, a higher screening aciviy should be observed when borrowers pos low guaranees. Furher, he average deb defaul should be higher when crediors righs are more sricly enforced given ha fewer projecs will be screened in his case. On he oher hand, Rajan and Winon (1995) predic ha secured deb should be observed more ofen in firms ha need monioring, and ha changes in guaranees should be posiively correlaed wih he onse of financial disress. Jiménez, Salas-Fumás 5

6 and Saurina (2006) discuss how he use of collaeral as a subsiue o he screening aciviy of he bank depends on lenders characerisics. Summing up, he review of he lieraure shows ha here is no clear agreemen abou he link beween guaranees and ineres raes. Some researchers find ha guaranees reduce he riskiness and his implies lower ineres raes; ohers ha lenders ask for guaranees when borrowers are more risky and, hus, ineres raes are higher. 3. Daa and summary saisics sources. This paper uses aggregaed and individual Ialian bank and firm daa drawn from several Aggregaed ime series on ineres raes are drawn from harmonized MIR (Moneary Financial Insiuion Ineres Raes) saisics, colleced by he Eurosysem since January 2003; his informaion is provided by a represenaive sample of banks, made up of abou 120 Ialian banks (which cover abou 75 per cen of oal asses of Ialian banking sysem). 5 Aggregaed daa on real and personal guaranees are drawn from bank supervision repors and are available for he whole banking indusry. Individual informaion on firms and producer households 6 6 comes from Cenral Credi Regiser and regards a sample made up of 60 large Ialian banks (which cover more han 50 per cen of oal asses of Ialian banking sysem); he daa se wih individual cusomer informaion includes more han 300,000 firms and abou 200,000 producer households, which received from Ialian banks loans equal o or larger han 75,000. Time series on loans mosly sar from 1999 and refer o he whole banking sysem. Time series on ineres raes sar from 2003, he firs year of he MIR saisics, and refer o a sample of banks. Our analysis mainly focuses on real and personal guaranees pledged by non-financial corporaions (firms), producer households and consumer households. Informaion on producer households and consumer households is provided by prudenial saisics. Table 1 shows he disribuion of loan by ype of guaranees and cusomers. I appears ha producer households are more similar o firms han o consumer households: loan shares o producer households assised by real and personal guaranees are similar o hose of firms han o hose of consumer households. 5 For furher deails, see Regulaion ECB/2001/18, and Baipaglia and Bolognesi (2003). 6 The erm firms used in banking saisics is equivalen o he ESA 95 secor non-financial corporaions and quasicorporaions ; producer households include sole proprieorships and small parnerships wihou independen legal saus which are marke producers.

7 The increase in he share of collaeral reflecs he growh of morgages. For he hree ypes of cusomers as a whole, he value of morgage loans is abou wice as large in 2005 as in 1999 (see Table 2). More specifically, he share of consumer households loans assised by real securiy is more han wice as large as ha of firms; his mainly reflecs he fac ha a high percenage of loans o consumer households are for house purchase (abou wo hird of oal loans), a large par of which is graned agains morgage. The large increase of he share of morgages implies a growing share of real guaranees and a decreasing share of personal guaranees in loan o consumer households: he laer was almos 10% in 1999, bu i dropped o around half of i in Finally, he share of loans wih no guaranees averaged around 24% beween 1999 and 2005, bu hey show a negaive rend over he years. As for firms, consisenly wih he observed increase in morgages (Table 2), collaeralized loans grew from 24% in 1999 o 32% in 2005 (Table1). Unsecured loans are he mos imporan loan caegory: hey are almos half of firms oal loans. This resul likely depends upon he beer qualiy informaion of firms in comparison wih households. Differenly, bu no surprising, he share of personal guaranees is higher for firms han for consumer households, he reasons being he higher riskiness of firms versus consumer households, he need for lenders o ask for personal guaranees when hey canno reques collaeral or, in oher cases, because of specific legal requiremens (e.g. for public works credi). Figures for producer households seem more similar o firms han o consumer households. The main difference wih firms is he lower value of unsecured loans: again, his could be explained wih he higher opaciy of producer households compared o firms. As for he composiion of bad loans by ype of guaranees, he larger share of bad loans originaes among unsecured loans (Table 3). This share is larges in he case of consumer households and smalles in he case of firms, in spie of he smaller shares of unsecured loans graned o consumer households (see Table 1). The disribuion of bad loans among secured loans mirrors he relaive weigh of he differen ypes of loans. This is especially rue in he case of consumer households which show a larger share of bad loans agains morgages (see Table 3). A clearer picure of he risk associaed wih differen cusomers and ype of loans is provided by he analysis of he overall bad loan-o-loan raio, a measure of credi risk (see Table 4). The raio is higher for households han for non-financial corporaions; producer households urns ou as he riskies cusomer especially for unsecured loans. 7 Wih he only excepion of firms, he defaul risk 7 There has been a general improvemen of he overall bad loan-o-loan raio beween 1999 and 2005; however his resul has been influenced by exraordinary securiizaion operaions and wrie-offs carried ou, especially in 2005 (see 7

8 is higher for collaeralized han unsecured loans. I is likely ha he low defaul risk associaed wih collaeralized loans depends on he ype of invesmen underaken wih he morgage, i.e. he purchase of propery, in a period of increasing house prices. 4. Model Specificaion and Resuls We esimae wo empirical ineres rae models. The firs makes use of average daa a bank level and is esimaed for hree ypes of cusomers: consumer households, firms, and producer households. The second makes use of informaion a bank-cusomer level and is only esimaed for firms and producer households. A descripion of variables and descripive saisics is repored in Appendixes 1 and Model 1 daa a bank level The firs model relaes he ineres rae spread (average loan rae overnigh rae) o loan size, cusomer riskiness, presence of guaranees, average lengh of he lending relaionship, plus addiional conrol variables: Ineres Rae Spread 7 PersonalGuaranees + β4 Loans + β = β + β 0 ( Average Loan Size) ( Average Loan Life) + β ( TimeDummies) ( RegionalDummy) + β ( Bank Size Dummy) + ε [1] i β 5 Bad Loans + β2 Loans 6 Collaeral + β3 Loans where he subscrip i refers o banks, he subscrip o he ime period, and ε is a composie error erm ha conains unobserved facors ( λ i, fixed or random), plus a Normally disribued error 2 ( u ~ N(0, σ )). u We esimae equaion [1] by means of a panel daase for hree differen ypes of borrowers: firms, consumer households, and producer households. We run boh fixed effecs and random effecs specificaions, bu only repor resuls for he laer on he basis of he Hausman Tes. Table 5 shows wo specificaions of equaion [1] for each cusomer ype, he difference being he replacemen of he Time Dummies variables, which conrols for he business cycle, by he Bank of Ialy (2006), pp. 232 and ). In he same year, producer households showed he highes overall bad loano-loan raio. 8

9 Marke Concenraion variable 8. Indeed, hese variables urned up o be srongly collinear given ha he laer is calculaed for each secor (firms, cusomer households and producer households) and each ime-period. Therefore, for each ype of secor he Marke Concenraion variable only shows ime variabiliy. Firms. As for firms, resuls in column (1) show ha he Average Loan Size coefficien is negaive and saisically significan. Moreover, larger loans are a proxy for averagely larger firms ha have sronger bargaining power and, herefore, are expeced o pay lower ineres raes. As expeced, we find ha Bad Loans 9 have a posiive and significan impac on he ineres rae spread, i.e., riskier cusomers are charged wih higher ineres raes. The coefficien on Collaeral is posiive and significan. As already noed above, collaeral does no increase he poenial loss suffered by he borrower, bu i is mainly used o order crediors prioriy. Therefore, ex-ane, he expeced sign of is coefficien is no clear. The fac ha he coefficien on Collaeral is posiive may be aken o mean ha collaeral is mainly linked o a higher risk, i.e., observably riskier borrowers are asked o pledge more collaeral. Personal Guaranees also have a posiive and significan coefficien. This resul is in line wih he prevailing lieraure according o which riskier borrowers are asked o pledge personal guaranees (ouside collaeral) o avoid sraegic defaul. The esimaed coefficien of he Regional Dummy is no saisically significan, meaning ha ineres raes charged by banks locaed in he Souhern regions are no differen from hose charged by banks locaed in he res of Ialy. Indeed, i is possible ha, conrolling for oher facors, Souhern banks provide loans also o firms locaed in oher regions, and/or ha oher variables (bad loans and guaranees) already capure he differences in cusomers riskiness in differen regional areas. The Average Loan Life coefficien is negaive and saisically significan. This variable is a proxy for he lengh of he lending relaionship; herefore, a decrease in he ineres rae is expeced wih an increase in he lengh of he lending relaionship. This finding is common o oher empirical sudies (among ohers, Berger and Udell, 1995; Jiménez, Salas and Saurina, 2006). As long as he lengh increases, he lender s informaion abou he borrower increases, and he moral hazard problem due o informaion asymmeries becomes less imporan (Boo and Thakor, 1994). As for he Bank Size Dummy, he esimaed negaive coefficien means ha larger banks charge lower ineres raes, a resul found in oher sudies. According o Manove and Padilla (1999), and Manove, Padilla and Pagano (2001) banks wih larger resources devoed o evaluaing he risk of a loan should have a lower incenive o subsiue he screening aciviy wih collaeral. On he same direcion, Jiménez, Salas and Saurina (2006), argue ha larger banks should have a comparaive advanage in erms of borrower risk 8 Marke concenraion is measured by he Herfindhal index a he naional level. This variables, herefore, only capures he overall concenraion of he banking sysem and no he concenraion a local level. 9 As in many ohers papers, we use he bad loans-loans raio as a proxy of riskiness (see Piazza and Sacchin 2007). 9

10 evaluaion. Therefore, hese banks should have fewer moral hazard problems, and charge lower ineres raes. Anoher inerpreaion is ha cusomer characerisics may differ sysemaically beween large and small banks; his is borne ou by he resul of model 2, where, afer accouning for cusomer fixed effecs, he coefficien of bank size changes sign. Esimaes in column (2) are similar o hose in column (1). The only change is ha in column (2) we have an explici variable measuring he degree of marke compeiion. Specifically, he coefficien of Marke Concenraion is posiive and saisically significan, meaning ha higher loan raes are associaed wih greaer marke concenraion. 10 Our resul also suppor he view of Inders and Mueller (2006) who claim ha an increase in bank compeiion should increase he demand for collaeral and decrease loan raes. Consumer households. As for consumer households, resuls for he wo specificaions of equaion [1] are shown in columns (3) and (4), respecively. Unlike in he case of firms, he coefficien of Bad Loans is no saisically significan, hough sill negaive. Therefore, ineres raes seem no o be influenced by households riskiness if he laer is measured by he share of Bad Loans. The coefficien of Collaeral is negaive and saisically significan. In his case, herefore, collaeral is used by safer borrowers o screening heir consumer ype and ake advanage of lower loan raes, as expeced in an adverse selecion seing (Beser, 1985 and 1987). On he oher hand, he esimaed coefficien of Personal Guaranees is no saisically significan. This finding may be inerpreed as a signal ha banks behave lazily by replacing heir screening aciviy (which should imply differen loan raes o differen borrower ypes) wih personal guaranees. For consumer households, i urns ou ha banks locaed in he Souh of Ialy charge higher loan raes han in he res of Ialy. Indeed, he coefficien of he Regional Dummy is posiive and significan; i is likely ha he level of compeiion in local credi markes for consumer households is no fully capured by he Marke Concenraion variable; hus i seems ha Souhern credi markes may be less compeiive han Cenral and Norhern credi markes and, consequenly, charge higher ineres raes. Finally, he coefficien of Bank Size is no saisically significan: consumer loans are usually offered in sandardized formas in a compeiive marke, and here seems o be no sysemaic differences beween he loan rae of small- and large-sized banks. As in he case of firms, he Marke Concenraion coefficien is sill posiive and significan in he second specificaion (column (4)), highlighing he fac ha banks in more concenraed credi markes charge higher ineres raes. Moreover, differenly from he previous specificaion, he coefficien of Personal Guaranees is also posiive and significan. As for firms, herefore, Personal 10 Peersen and Rajan (1995) find ha he impac of marke concenraion is differen according o he age of he firm, negaive for young firms, posiive for older firms. We canno disenangle hese effecs due o he lack of informaion on firms age. 10

11 Guaranees are asked o riskier borrowers o reduce sraegic defauls, and some screening aciviy seem o be performed by banks. However, i is worh noing ha loans secured by personal guaranees are a small share of he oal amoun of loans o consumer households. Producer households. Columns (5) and (6) show resuls for producer households, wih he Time Dummies and Marke Concenraion variables, respecively. Also in his case he posiive and saisically significan coefficien of Bad Loans signals ha higher ineres raes are associaed wih higher risks. As for consumer households, Collaeral and Personal Guaranees are used o miigae adverse selecion and moral hazard problems, respecively. Indeed, he esimaed coefficiens are of opposie signs (negaive and posiive, respecively), bu hese findings are robus only when we conrol for Marke Concenraion (see Column (6)). As explained above, his resul may indicae ha bank are lazier wih producer households and consumer households han wih firms. Banks require secured loans, bu higher guaranees are no necessarily associaed wih riskier cusomers and higher ineres raes. Again, he coefficien of he Regional Dummy is posiive and saisically significan jus in he specificaion wih no Marke Concenraion variable (column (5)), while his dummy is no significan when Marke Concenraion is included in he equaion. As observed in he case of consumer households, even for producer households he Regional Dummy variable seems o capures he marke concenraion a local level: Souhern producer households are eiher riskier or hey are operaing in less compeiive credi markes. Finally, for more concenraed credi markes, he cos of loans, capured by he loan rae, is higher. Summary. The disincion beween firms, consumer households, and producer households is empirically imporan. Our resuls show ha: for firms, boh real and personal guaranees have a posiive relaionship wih ineres raes, supporing he idea ha guaranees help solving moral hazard problems; he posiive relaionship beween ineres raes and personal guaranees seems o sugges ha banks do no behave lazily ; for consumer and producers households, collaeral is mainly used as a screening device agains adverse selecion, so ha safer borrowers ake advanage of lower ineres raes; here seems o be a weak relaionship beween ineres raes and personal guaranees. As for lazy bank hypohesis, in he case of hese wo secors canno be reached clear and robus oucomes. 4.2 Model 2 daa a bank-cusomer level 11

12 Our second ineres rae model is esimaed for firms and producer households, bu no for consumer households because loans o consumer households are mainly morgages ha, as said, have o be assised by real collaeral; in addiion, he esimae could be biased due o he hreshold of 75,000 in he collecion of daa for he Cenral Credi Regiser. Therefore, daa on loans o consumer households could be incomplee because a large share of heir loans are smaller han 75,000. This second model differs from model [1] because i makes use of loan informaion a he cusomer level. Because of he lack of daa on bad loans and ineres raes a cusomer level, we have o approximae he riskiness of he cusomer using he bad loan-o-loan raio of he branch of aciviy of he borrower. However, he exisence of a (fixed or random) cusomer effecs may capure individual risk characerisics ha are observed by banks. For firms a binary dummy privae vs. public firms is included. Our empirical model is: IneresRae Spread 7 j, PersonalGuaranees + β4 Loans + β = β + β 0 j, ( Loan Size) ( Average Loan Life) + β ( TimeDummies) ( RegionalDummies) + β ( Type of Company Dummy) + ε [2] i β 5 j, Bad Loans + β2 Loans j, j, 6 s, j, Collaeral + β3 Loans j, where he subscrip i refers o banks, j o firms, o ime periods, and s o he firm indusry. ε is a composie error erm. i, j, We esimae equaion [2] by running boh fixed effecs and random effecs esimaors, bu only repor resuls for he former on he basis of he Hausman Tes. Esimaes of equaion [2] are shown in Table 6. Firms. As for firms, he esimaed coefficien of Collaeral is saisically significan, bu his ime i is negaive while i was posiive in he case of equaion [1]. This difference likely reflecs he presence of individual fixed effecs in equaion [2] ha may accoun for cusomer characerisics, among which riskiness is he mos imporan. In oher words, once we conrol for individual cusomer riskiness, more collaeral appears o be an exra screening device ha helps banks solving adverse selecion problems and, herefore, in lower ineres raes. As is he case of equaion [1], he coefficien of Personal Guaranees is posiive and saisically significan; he value of coefficien is however very small. This could be influenced by he presence of individual fixed effecs ha accoun for cusomer characerisics; hus, individual daa srenghen he evidence ha riskier borrowers are asked o pledge addiional warranies (personal guaranee) and, consequenly, banks ask for higher ineres raes. 12

13 The esimaed coefficiens of he main conrol variables confirm our previous conclusions. The esimaed coefficiens of Bad Loans, Loan Size and Loan Life are all saisically significan and have he same signs as in he case of equaion [1]. Bad Loans has a posiive effec on ineres raes confirming ha a higher defaul probabiliy (approximaed by he raio bad loans/loans per branch) implies higher ineres raes. Loan Size and Loan Life boh have a negaive impac on ineres raes, srenghening he imporance of borrowers conracual power and of asymmeric informaion problems in seing ineres raes, respecively. Daa a firm level also permi o disinguish beween privae and sae owned firms. The binary Privae Firm Dummy, ha akes value 1 when firms are privae, has a significan and posiive coefficien. In oher words, privae firms are seen as riskier han sae owned firms. 11 The binary Bank Size Dummy, ha akes value 1 for large banks, has a significan and posiive coefficien; his implies ha larger banks carry higher ineres raes. This oucome differs from ha in equaion [1] and could signal he presence of marke power of larger banks, once we accoun for cusomer characerisics. 12 Finally, Regional Dummies coefficiens are no saisically significan. This resul could suppors he inerpreaion of a homogeneous bank loan marke, once we conrol for cusomer characerisics. Producer households. As for producer households, he Collaeral coefficien is negaive and saisically significan reflecing, as in he case of firms, he role of real guaranees as a signalling device in an adverse selecion conex. The coefficien of Personal Guaranees is also saisically significan bu, unlike in he case of firms, i is negaive. This difference can be explained wih he differen naure of personal guaranees in he case of firms and producer households. Firms are, almos always, limied companies 13 ; hus, he personal wealh of he enrepreneur is no involved in firms obligaions and his can increase he concerns abou moral hazard problems. On he oher hand, producer households are unlimied companies and he personal wealh of he enrepreneur is always, herefore by definiion, pledged agains he loan; his should miigae moral hazard risk and, hus, personal guaranees pledge by hird paries are furher exernal guaranees, and, similarly o collaeral, solve adverse selecion problems; his implies a negaive sign of he coefficien and lower ineres raes. 11 I is worh noing ha his dummy could include informaion on he firm size, given ha public firms are almos enirely large firms. 12 This oucome can also influence by differences in ypes of producs. 13 Jus a small fracion of firms is unlimied company. 13

14 As expeced, bad loans show a posiive and significan relaion wih ineres raes, while loan size has a negaive and significan effec on he level of ineres raes. The laer resul confirms ha larger borrowers among producer households are assessed as beer cusomers. The Loan life variable has a non-significan. The binary Bank Size Dummy has a significan and posiive coefficien. As above, his oucome could signal he presence of marke power of larger banks, once we accoun for cusomer characerisics. As in he esimaed model for firms, Regional dummies are no significan and, again, his seems o suppors he presence of an inegraed credi marke, once we conrol for cusomer characerisics. 5. Conclusion This paper analyzed he relaionship beween guaranees and ineres raes in Ialy, paying a special aenion o he disincion beween real and personal guaranees. We aemped o answer wo main quesions : does he empirical evidence suppor he convenional wisdom ha secured loans are less risky and, hus, hey carry lower ineres raes? does he empirical evidence suppor he hypohesis ha collaeral reduces he screening aciviy of banks (so called lazy bank hypohesis ) and increases moral hazard risks? Firs, we carried ou our analysis by breaking down Ialian banks cusomers in hree caegories (firms, consumer households and producer households), and using a sample of bank daa drawn from he Saisical Reurn. Secondly, we repeaed he exercise by means of a large sample wih individual cusomer daa drawn from he Cenral Credi Regiser. In his case firms and producer households were included in he sample. A firs empirical resul based on he disribuion of loans and guaranees is ha he hree secors are differen: producer households behave more similarly o firms han o consumer households. The laer ask for loans mainly for house purchases and, hus, pledge a large share of collaeral while he share of personal guaranees pledged by firms and producer households is larger. The lack of homogeneiy suggess ha a differen economeric analysis mus be carried ou for each secor. In he case of consumer households our economeric analysis provides unclear, or no significan esimaes abou he relaionship beween guaranees and ineres raes. In addiion, he 14

15 large share of real-esae loans assised by collaeral reduces he concern abou he lazy bank hypohesis for consumer households. As for firms, aggregaed daa a bank level show ha boh real and personal guaranees have a posiive effec on ineres raes, hus supporing he idea ha guaranees help solving moral hazard problems and ha banks screening aciviy is no lazy. The picure for firms is somewha richer when we used a more deailed daase conaining informaion a firm and bank level. In his model, he presence of individual fixed effec allows us o accoun for cusomer characerisics. Ineres raes are sill significanly affeced by guaranees. However, collaeral has a negaive effec and, hus, appears o be a device ha helps banks solving adverse selecion problems, while personal guaranees show a posiive coefficien and are sill used o reduce he possibiliy of opporunisic behavior of borrowers afer he ransacion occurred (moral hazard). As for producer households, aggregaed daa a bank level show weak resuls, while informaion a firm and bank level provides more robus esimaes. In he laer, boh real and personal guaranees have a negaive effec on ineres raes, hus supporing he idea ha guaranees help solving adverse selecion problems, once cusomer riskiness is conrolled for. A his sage, he link beween guaranees and ineres raes is no robus; fuure developmens will include an analysis wih income and cos variables and informaion on financial producs o manage credi risk (i.e., credi derivaes). 15

16 References Bank of Ialy (2006), Ordinary General Meeing of Shareholders, Rome. Barro R. J. (1976), The Loan Marke, Collaeral, and Raes of Ineres, Journal of Money, Credi and Banking, 8, pp Baipaglia P. and F. Bolognesi (2003), The Harmonizaion of European Saisics on Bank Ineres Raes and he Mehodology Adoped by Ialy, Supplemens o he Saisical Bullein - Mehodological Noes and Saisical Informaion n. 57, Banca d'ialia. Berger A. N. and G. F. Udell (1990), Collaeral, Loan Qualiy, and Bank Risk, Journal of Moneary Economics, 25, Berger A. N. and G. F. Udell (1995), Relaionship Lending and Lines of Credi in Small Firms Finance, Journal of Business, 68 (3), Beser H. (1985), Screening vs Raioning in Credi Markes wih Imperfec Informaion, American Economic Review, 57, Beser H. (1987), The Role of Collaeral in Credi Markes wih Imperfec Informaion, European Economic Review, 31, Beser H. (1994), The Role of Collaeral in a Model of Deb Renegoiaion, Journal of Money, Credi and Banking, 26, Besanko D. and A. V. Thakor (1987), Collaeral and Raioning: Soring Equilibria in Monopolisic and Compeiive Credi Markes, Inernaional Economic Review, 28 (3), Boo A. W. A. and A. V. Thakor (1994), Moral Hazard and Secured Lending in an Infiniely Repeaed Credi Marke Game, Inernaional Economic Review, 35 (4), Boo A. W. A., A. V. Thakor and G. F. Udell (1991), Secured Lending and Defaul Risk: Equilibrium Analysis, Policy Implicaions, and Empirical Resuls, Economic Journal, 101 (406), Chakravary S. and T. Yilmazer (2005), A Reexaminaion of he Role of Relaionship in he Loan Graning Process, Federal Reserve Bank of Chicago s research websie, CEDRIC, hp:// Inders R. and H. M. Mueller (2006), A Lender-Based Theory of Collaeral, CEPR Discussion Paper Jimenez, G., Salas V. and J. Saurina (2006), Deerminans of Collaeral, Journal of Financial Economics, 81, John K., Lynch A. W. and M. Puri (2003), Credi Raings, Collaeral and Loan Characerisics: Implicaions for Yield, Journal of Business, 76,

17 Longhofer S. D. and J. A. C. Sanos (2000), The Imporance of Bank Senioriy for Relaionship Lending, Journal of Financial Inermediaion, 9(1), Manove M. and A. J. Padilla (1999), Banking (conservaively) wih opimiss, Rand Journal of Economics, 30(2), Manove M., Padilla A. J. and M. Pagano (2001), Collaeral versus Projec Screening: A Model of Lazy Banks, Rand Journal of Economics, 32(4), Ono A. and I. Uesugi (2006), The Role of Collaeral and Personal Guaranees in Relaionship Lending: Evidence from Japan s Small Business Loan Marke, mimeo. Peersen M. A. and R. G. Rajan (1994), The Benefis of Lending Relaionship: Evidence from Small Business Daa, Journal of Finance, 49(1), Peersen M. A. and R. G. Rajan (1995), The Effec of Credi Marke Compeiion on Lending Relaionship, Quarerly Journal of Economics, 110(2), Piazza M. and M. Sacchini. (2007), Wha s risk go o do wih i? An analysis of ineres raes in he Ialian consumer credi marke", mimeo. Pozzolo A. F. (2004), The Role of Guaranees in Bank Lending, Banca d Ialia, Temi di discussione n Rajan R. and A. Winon (1995), Covenans and Collaeral as Incenives o Monior, The Journal of Finance, 1(4),

18 Table 1 Composiion of Loans by ype of guaranee (percen) All cusomers Collaeral Personal Guaranees Unsecured Consumer households Collaeral Personal Guaranees Unsecured Producer households Collaeral Personal Guaranees Unsecured Firms Collaeral Personal Guaranees Unsecured

19 Table 2 Loans by secors (millions of euros and percen) CONSUMER HOUSEHOLDS PRODUCER HOUSEHOLDS FIRMS Consumer credi Lending for house purchase Oher lending Consumer credi Lending for house purchase Oher lending Toal of which : morgages socks growh rae % socks growh rae % socks growh rae % socks growh rae % socks growh rae % socks growh rae % socks growh rae % socks growh rae % 19

20 Table 3 Composiion of Bad Loans by ype of guaranee (percen) All cusomers Collaeral Personal Guaranees Unsecured Consumer households Collaeral Personal Guaranees Unsecured Producer households Collaeral Personal Guaranees Unsecured Firms Collaeral Personal Guaranees Unsecured

21 Table 4 Bad Loans o loans raios by ype of guaranee (percen) All cusomers Collaeral Personal Guaranees Unsecured Consumer households Collaeral Personal Guaranees Unsecured Producer households Collaeral Personal Guaranees Unsecured Firms Collaeral Personal Guaranees Unsecured

22 Table 5 REGRESSION ANALYSIS [1] DATA AT BANK LEVEL Random Effecs Esimaes Dependen Variable: Spread (Ineres Rae Overnigh Rae) EXPLANATORY FIRMS CONSUMER PRODUCER HOUSEHOLDS VARIABLES HOUSEHOLDS (1) (2) (3) (4) (5) (6) Bad loans/loans 2.34 *** 2.38 *** *** 2.82 *** (0.73) ( 0.76) (1.06) (1.04) (0.72) (0.77) Collaeral/loans 0.67 *** 0.61 ** * ** *** (0.25) (0.24) (0.29) (0.30) (0.26) (0.27) Personal 0.82 ** 0.81 ** * ** guaranees/loans (0.25) (0.39) (0.87) (0.87) (0.35) (0.34) Average loan life ** ** (0.08) (0.07) Average loan size ** ** (0.07) (0.07) Marke ** *** concenraion (14.17) (8.96) (23.17) Regional dummy *** 0.79 *** 0.32 ** 0.18 (Souh=1) (0.11) (0.11) (0.19) (0.19) (0.13) (0.14) Bank size dummy * * (large bank=1) (0.10) (0.10) (0.17) (0.17) (0.14) (0.14) Consan Time dummies Hausman Tes No. of Obs No. of Banks Robus Sandard Errors are shown in parenheses; * p<0.10, ** p<0.05, *** p<0.01 significance levels, respecively 22

23 Table 6 REGRESSION ANALYSIS [2] DATA AT FIRMS AND BANK LEVEL Fixed Effecs Esimaes Dependen Variable: Spread (Ineres Rae Overnigh Rae) EXPLANATORY FIRMS VARIABLES Bad loans/loans per branch 2.15 (0.178) Collaeral/loans (0.009) Personal guaranees/loans 0.02 (0.006) Loan life (0.004) Firm size dummy (0.008) Privae firms dummy 0.55** (0.190) Bank size dummy 0.32 (0.004) Norh dummy 0.02 (0.037 Souh dummy PRODUCER HOUSEHOLDS *** (0.339) *** (0.016) *** (0.015) *** 2.76 *** *** *** 0.00 (0.010) *** *** (0.048) *** 0.40 *** (0.014) 0.19 (0.138) 0.16 (0.148) (0.044) Consan Time dummies Hausman es (p-value) No. of observaions No. of firms Robus Sandard Errors are shown in parenheses; * p<0.10, ** p<0.05, *** p<0.01 significance levels, respecively 23

24 Appendix 1 Daa a Bank Level Summary Saisics Variable Mean Sandard deviaion Min Max Firms Spread (ineres rae overnigh rae) Bad Loans/ Loans Collaeral/ Loans Personal guaranees/ Loans Average Loan Life Herfindhal Index Average Loan Size (log) Consumer Households Spread (ineres rae overnigh rae) Bad Loans/ Loans Collaeral/ Loans Personal guaranees/ Loans Herfindhal Index Producer households Spread (ineres rae overnigh rae) Bad Loans/ Loans Collaeral/ Loans Personal guaranees/ Loans Herfindhal Index Variable definiion Bank Ineres Raes. Time series on ineres raes are drawn from harmonized MIR (Moneary Financial Insiuion Ineres Raes) saisics, colleced by he Eurosysem since January 2003, primarily as a suppor o moneary policy. However MIR saisics are also suiable for economic analysis a naional level. This informaion is colleced and compiled by he Eurosysem; i is based on a represenaive sample of banks, made up of abou

25 Ialian banks. Ineres raes on loans o firms is he weighed average of new businesses up o and over 1 million; ineres raes on loans o consumer households and producer households is he weighed average of new businesses graned for consumer cred house purchases and oher purposes. Overnigh ineres raes are he arihmeic mean of he weighed average raes daily raded on he Inerbank Deposi Marke. Guaranees. Real guaranees are mainly morgages graned by borrowers o he bank; personal guaranees are guaranees graned by hird paries in favor of borrowers. Daa are drawn from Saisical Reurn. Loans and Bad Loans. Daa are drawn from Saisical Reurn. Average Loan Life. This informaion is he average lengh (in years) of cusomer relaionship for each bank in he sample; i is figured ou for firms, using individual daa and refers o a period of five years prior each reference dae. Daa are drawn from Cenral Credi Regiser. Given ha he Cenral Credi Regiser records borrowers wih loans larger han 75,000, Average Loan Life has only been calculaed for firms. Regional Dummy. Binary dummy variable equal o 1 for banks wih headquarer in Souhern Ialy and 0 oherwise. Bank Size. Binary dummy variable equal o 1 for banks which are classified as major or large, according o Banca d'ialia s classificaion by size (see Bank of Ialy, 2006), and 0 oherwise. Marke Concenraion. Herfindhal index on new loans o firms and households. This variable is calculaed for each ime period of our sample. Average Loan Size. This variable is he raio beween oal loans and he number of cusomers, i.e., he average loan size graned by each bank o cusomers. I is calculaed by using individual daa drawn from he Cenral Credi Regiser. As in he case of Average Loan Life, his variable is calculaed only for firms. 25