Credit Market Competition, Collateral and Firms' Finance

Abstract

This paper investigates the relationship between credit market competition and the availability of bank credit for firms of unobserved credit quality when firms pledge collateral to secure the loans. Loan data from the Spanish Credit Register shows that the average credit quality of borrowers that get loans in a provincial market decreases with market concentration (which is shown to be positively correlated with market power) and with the availability of collateral, although the marginal effect of each variable decreases for higher values of the other. We also find that credit lines' interest rates increase with the availability of collateral, but the increase is lower for banks operating in more concentrated credit markets. Therefore market power in credit markets and collateral appear as substitutes to increase the availability of bank finance under asymmetric information.

Keywords: collateral, competition, asymmetric information, relationship banking

JEL Classification: G21