Conference Agenda

This paper studies how lenders' ability to monitor collateral and mitigate frictions in collateralization affect credit outcomes. Exploiting law reforms that subject collateral monitoring to information asymmetries, I show that such reforms trigger credit reallocation from foreign to domestic lenders. Following the legal change, the moral hazard in monitoring collateral by foreign lenders increases. In response, foreign lenders decrease loan issuance and acceptance of movable collateral from treated firms, while increasing the use of covenants. The reallocation effects translate into a reduction in firms' employment and net income in the post-period. These results highlight the importance of friction associated with collateralization in shaping credit markets.

We investigate how lending syndicates respond to unconventional monetary policy interventions by central banks that target non-financial firms. The introduction of the corporate sector purchase program (CSPP) of the European Central Bank allows us to study how lenders adapt to an unexpected decrease in credit demand by CSPP-eligible borrowers. Our findings show that lenders compensate for the deterioration in demand by redirecting capital to new borrowers in the leveraged loan market, as compared to the investment grade market. As the probability for relationship lending with borrowers decreases, we observe that lenders rely more on relationship lending between lenders and increase their collateral requirements. Our findings indicate that lenders compensate for additional risks, which speaks against excessive risk taking of lenders. Lastly, we find that a country’s legal efficiency can manage the effects of unconventional monetary policy, as lenders can more easily finance riskier loans in environments with high debt enforcement.

Theory suggests that by lending to a firm, inside banks gain an informational advantage over non-lender outside banks. This informational gap hinders borrowers from switching lenders due to a winner’s curse faced by competing outside banks, leading to hold-up problems. In this paper, we show that having a deposit relationships with outside banks can reduce this informational gap, thereby attenuating hold-up. Using unique data on the deposit and lending relationships of all firm-bank pairs in Norway, we find that having a deposit relationship with non-lender outside banks significantly increases a firm's likelihood of switching lenders. Furthermore, firms that have a prior deposit relationship with new lenders obtain significantly better loan conditions upon switching. In line with informational hold-up theory, these effects are driven by reduced information asymmetries, not cross-selling. Overall, our findings have important implications for information sharing and open banking initiatives in the loan market.