TY  - RPRT
A1  - Elsas, Ralf
A1  - Krahnen, Jan Pieter
T1  - Collateral, default risk, and relationship lending : an empirical study on financial contracting
N2  - This paper provides further insights into the nature of relationship lending by analyzing the link between relationship lending, borrower quality and collateral as a key variable in loan contract design. We used a unique data set based on the examination of credit files of five leading German banks, thus relying on information actually used in the process of bank credit decision-making and contract design. In particular, bank internal borrower ratings serve to evaluate borrower quality, and the bank's own assessment of its housebank status serves to identify information-intensive relationships. Additionally, we used data on workout activities for borrowers facing financial distress. We found no significant correlation between ex ante borrower quality and the incidence or degree of collateralization. Our results indicate that the use of collateral in loan contract design is mainly driven by aspects of relationship lending and renegotiations. We found that relationship lenders or housebanks do require more collateral from their debtors, thereby increasing the borrower's lock-in and strengthening the banks' bargaining power in future renegotiation situations. This result is strongly supported by our analysis of the correlation between ex post risk, collateral and relationship lending since housebanks do more frequently engage in workout activities for distressed borrowers, and collateralization increases workout probability.
KW  - relationship lending
KW  - housebanks
KW  - collateral
KW  - loan contract design
KW  - workouts
Y1  - 1999
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35063
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-350634
UR  - http://www.fbv.kit.edu/symposium/8th/papers/elsas.pdf
N1  - First version: March 12, 1999 ; Current draft: May 18, 1999
IS  - Version May 18, 1999
ER  -