May 2022

The Collateral Channel and Bank Credit

Arun Gupta, Horacio Sapriza, and Vladimir Yankov

Abstract:

Our paper studies the role of the collateral channel for bank credit using confidential bank-firm-loan data. We estimate that for a 1 percent increase in collateral values, firms pledging real estate collateral experience a 12 basis point higher growth in bank lending with higher sensitivities for more credit constrained firms. Higher real estate values boost firm capital expenditures and lead to lower unemployment and higher employment growth and business creation. Our estimates imply that as much as 37 percent of employment growth over the period from 2013 to 2019 can be attributed to the relaxation of borrowing constraints.

Keywords: bank credit, collateral channel, corporate investment, firm borrowing constraints, macro-finance mechanisms

DOI: https://doi.org/10.17016/FEDS.2022.024

PDF: Full Paper

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Last Update: May 10, 2022