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					               Collateral Characteristics, Borrower Risk, and Asymmetric Information



1. Introduction

        Collateral is a defining feature of many types of credit contracts. All residential and commercial

mortgages are secured by real property and all inter-bank repurchase agreements involve liquid securities

as collateral, while credit card loans to individuals and inter-bank funding via federal funds are generally

unsecured. Interestingly, commercial and industrial loans represent an important segment of the credit

markets for which collateral is a negotiated loan term and is only sometimes present.1 Moreover, we

observe a wide variety of assets being pledged in commercial loan contracts – from securities to inventory

to manufacturing equipment – with specific assets being selected based upon the firm’s industry (which

determines available assets), firm risk (expected default), and lender valuations (affecting expected

recovery in the event of default). As discussed further below, collateral also varies in important ways

depending on the degrees of liquidity and divertibility, and whether the collateral comes from inside or

outside the borrowing firm.

        Economic theory generally explains collateral as an attempt to reduce agency costs or contracting

frictions in the presence of asymmetric information. One set of theoretical models focuses on ex ante

private information and suggests that collateral may allow lenders to sort observationally equivalent loan

applicants through signaling.        Specifically, lenders offer a menu of contract terms such that

observationally equivalent applicants with higher-quality projects choose secured debt with lower risk

premiums, while those with lower-quality projects self-select into unsecured debt with higher risk

premiums (e.g., Bester 1985, 1987, Besanko and Thakor 1987a, 1987b, Chan and Thakor 1987, Boot,

Thakor, and Udell 1991). A second set of theoretical models motivates collateral as part of an optimal


1
  For example, in the United States at the end of 2009, commercial and industrial loans comprised 9.8% of the $11.8
trillion in commercial bank assets with an estimated 43.6% of these loans being collateralized. The bank balance
sheet data comes from the Federal Deposit Insurance Corporation’s Statistics on Banking (as of December 31,
2009), while the Federal Reserve’s Survey of Terms of Bank Lending provides information on commercial loan
terms (as of November 2-6, 2009).


                                                        1
debt contract by invoking ex post frictions, most notably moral hazard (e.g., Boot, Thakor, and Udell

1991, Boot and Thakor 1994, Aghion and Bolton 1997, Holmstrom and Tirole 1997). These ex post

theories predict that observably riskier borrowers are more likely to be required to pledge collateral. All

else equal, lenders prefer collateral with characteristics that better mitigate moral hazard incentives and

reduce loss given default.

        Toward empirically testing these theories, several studies link measures of borrower risk (such as

ex ante loan risk premiums or ex post nonperformance) to whether or not collateral was pledged for a

given credit. Some studies report a positive relationship between loan risk premiums (loan rates less the

risk-free rate) and collateral pledges (Berger and Udell, 1990; Blackwell and Winters, 1997; Machauer

and Weber, 1998; John, Lynch, and Puri, 2003; Brick and Palia, 2007), while others find a negative

relationship (Degryse and Van Cayseele, 2000; Lehmann and Neuberger, 2001; Berger, Frame, and

Ioannidou, forthcoming). Two other studies find that ex post nonperformance of loans is positively

related to collateral pledges (Jimenez and Saurina, 2004; Berger, Frame, and Ioannidou, forthcoming).

        Importantly, the aforementioned empirical approaches cannot individually test the two sets of

collateral theories, but rather one may only surmise whether the ex ante private information theories or

the ex post incentive conflict models dominate empirically. It is clear that the ex ante private information

theories predict a negative relationship between collateral and risk. However, the ex post theories imply

the existence of both a “selection effect” under which observably riskier borrowers are required to pledge

collateral and a “mitigation effect” insofar as collateral pledges reduce loan risk (e.g., Benmelech and

Bergman, 2009).

        The extent to which the information-based contracting frictions are mitigated should also depend

on the strength of the collateral commitment, which should be related to the type and economic

characteristics of the collateral. For instance, under the private information theories, one should expect

the type and characteristics of collateral to affect the lender’s perception of the collateral signal sent by

pledging borrowers. That is, borrowers that pledge collateral should be perceived as less risky but the

extent to which this is so should depend on the type and characteristics of the collateral. Under the ex

                                                     2
post theories, collateral acts to mitigate loan risk, although once again the strength of this effect will be

influenced by collateral type and characteristics. Hence, collateral type and characteristics can affect both

the incentives to repay and the expected loss in the event of default. As a result, other things being equal,

one should expect that more desirable collateral types and characteristics should be associated with lower

ex ante loan risk premiums and reduced rates of ex post nonperformance and loss.

        A very limited amount of prior research exists that describes some important individual collateral

types and characteristics, although there has been no prior research (of which we are aware) that looks at

various collateral types and/or characteristics in the cross-section. One paper did distinguish mortgage

and non-mortgage collateral when examining loan interest rates (Puri, John, and Lynch, 2003). Other

papers have looked strictly at samples of commercial property contracts (Benmelech, Garmaise, and

Moskowitz, 2005) or airline leases (Benmelech and Bergman 2008, 2009, 2010). In our analysis below,

we explore the relationship between measures of borrower risk and collateral in general, various collateral

types (e.g., commercial real estate, bank deposits, etc.) and then three key collateral characteristics: (1)

the liquidity of the collateralized asset; (2) the ability of the firm to reduce maintenance or otherwise

divert the asset to alternative uses; and (3) whether the collateral comes from inside or outside of the firm.

        Collateral liquidity refers to the ease, cost, and time with which the secured assets can be sold for

fair market value in the event of default. Other things being equal, lenders should prefer more liquid

assets, such as bank deposits and marketable securities, which will increase their expected recovery value.

        Some secured assets, like equipment, remain in the control of the borrowing firm and hence may

be potentially diverted away from their intended use or otherwise not maintained. Hence, all else equal,

lenders should prefer non-divertable assets.

        As discussed by Chan and Kanatas (1985), the economic theories of collateral described

above generally assume that the asset being pledged actually comes from outside of the firm –

i.e., it is an asset not otherwise legally attachable in the event of default.                This “outside

collateral,” such as the entrepreneur’s home, should act like equity and therefore lower


                                                      3
probability of borrower default. As a result, other things being equal, we should expect outside

collateral to be associated with lower borrower risk relative to inside collateral. That said, one

prior study found that the pledging of outside collateral is more likely for informationally opaque

credits – loans made to younger and family firms and small loans – perhaps reflecting a selection

effect (Voordeckers and Steijvers 2006). We try to avoid such a selection effect in our empirical

analysis below.

        This paper examines the relationship between borrower risk and collateral types and

characteristics. Specifically, we relate ex ante loan risk premiums to indicators of collateral in general,

various collateral types, and the three key collateral characteristics of liquidity, divertibility, and outside

versus inside status, holding constant a number of bank, borrower, and loan attributes. We conduct these

empirical analyses using detailed commercial loan-level data provided by a national credit registry. By

way of preview, we document a negative relationship between loan risk premiums and collateral. This

relationship is confirmed for all types of collateral in the data – except for residential real estate. A more

detailed examination suggests that this latter result is a consequence of riskier commercial borrowers

pledging their homes as collateral. We also find that liquid collateral generates a significant discount in

loan risk premiums, although outside collateral is surprisingly associated with higher premiums.

Additional analysis of ex post loan performance documents a positive relationship with collateral overall,

but one that varies by collateral type.      Liquid and non-divertible collateral is found to reduce the

probability of ex post nonperformance.

        The remainder of the paper is structured as follows. Section II describes the credit registry data

we use. Section III outlines our empirical tests and Section IV presents results. Section V provides some

additional evidence, while Section VI concludes.



II. Data




                                                      4
        The data come from the Central de Información de Riesgos Crediticios (CIRC), the public credit

registry of Bolivia, provided by the Bolivian Superintendent of Banks and Financial Entities (SBEF).

Since CIRC’s creation in 1989, the SBEF requires all formal (licensed and regulated) financial

institutions operating in Bolivia to record information on all loans. Our sample covers the entire credit

registry for the period between January 1998 and December 2003. For each loan, we have information on

origination and maturity dates, credit type, amount, interest rate, collateral type and value (when collateral

is pledged), and ex post performance through the sample period (amounts overdue and/or written off).

For each borrower, we have information about their industry, physical location, legal structure, banking

relationships, and whether they have been delinquent or defaulted on another loan in the recent past.

        The data include loans from commercial banks and non-bank financial institutions (e.g., private

financial funds, credit unions, mutual societies, and general deposit warehouses). To keep the set of

lenders homogenous in terms of financial structure and regulation, we focus exclusively on commercial

loans granted by commercial banks between March 1999 and December 2003.2 Table 1 provides a list of

the 13 commercial banks that were active in Bolivia during the sample period, seven of which were

foreign owned – four branches and three subsidiaries.3 As shown in Table 1, five banks dominated the

Bolivian banking sector during this time – each with total assets averaging at least US$500 million and

with more than 10 percent market share of deposits and loans. The Herfindahl-Hirschman Index for

deposits is 1,292 and for loans it is 1,236, suggesting moderate market concentration.

        There are several types of commercial credit contracts in the data, including credit cards,

overdrafts, installment loans, discount loans, and lines of credit. We focus exclusively on installment

loans and discount loans, which together account for 92 percent of the total value of commercial loans



2
  Although we have data as of January 1998, we start our sample in March 1999 since prior to this date the data do
not allow us to distinguish been commercial and consumer loans. However, we use the prior information from
January 1998 through February 1999 to help fill in history on loans and relationships that existed as of March 1999.
3
  Foreign-owned banks operating in Bolivia have similar rights and responsibilities as domestically-owned
institutions. One of the foreign branches, ABN Amro, left the Bolivian market in November 2000.


                                                         5
during the sample period. Of these contracts, 98 percent are denominated in U.S. dollars, and we use only

these loans in our analysis. We also only study new loans originated during the sample period. A loan is

defined by a unique identification code and a date of origination. This includes new loans to new or

existing customers, and also renegotiations of previous loans. Banks, however, are required to indicate

whether a new loan is a renegotiation of a previous (performing or nonperforming) loan and we use this

information to exclude renegotiations.4 We also do not include as new loans those drawn on pre-existing

lines of credit.5 Our sample encompasses 28,322 loans to 2,470 different firms.

         Table 2 provides variable names, definitions, and summary statistics for all loans in the sample.6

Most of the sample firms are corporations (70.7 percent), while partnerships (14.6 percent) and sole

proprietorships (12.6 percent) are much less common. Only 0.3 percent of the loans were given to

borrowers that had defaulted in the prior twelve months (Recent Prior Default), while 21.2 percent were

given to firms with delinquencies in the prior 12 months (Recent Prior Delinquency). Hence, it seems

that borrowers that default rarely get another loan, either because they are credit rationed or cease to exist

as a going concern. The estimated average length of a banking relationship is 23 months. This is defined

as the number of months since the first loan in the data for the bank-borrower pair as of January 1998.

         Turning to the loan characteristics, almost one-half of the sample is composed of installment

loans. The average loan amount is US$148,745 and the average loan maturity is 11 months. The average

loan carries an interest rate of 13.5 percent, with a spread of 9.5 percent over comparable U.S. Treasury

securities. With respect to ex post performance of the 25,983 loans that matured before the end of the




4
  To the extent that some renegotiations are not recorded (either because of reporting errors or because banks do that
intentionally to reduce their loan loss reserves), our sample would include some renegotiations as new loans.
5
  When a borrower draws on a pre-existing line of credit, a “new loan” appears in the registry with origination date
and contract terms as of the date the bank originated the credit line. Since the date the loan first appears in the
registry is subsequent to the origination date, we can identify when a “new loan” is a draw on a pre-existing line of
credit and exclude it from our sample.
6
 For relationship length, loan amount, and maturity we report summary statistics for the level of these variables, but
our empirical models (below) incorporate the natural logarithm of one plus the level.


                                                          6
sample period, 5.4 percent had ex post delinquencies or defaults, with an average amount due or written

off equal to 77 percent of the origination loan amount.

        As in the U.S., secured debt in Bolivia has effective priority over unsecured debt in bankruptcy

(see Djankov, McLiesh, and Shleifer 2007). About 18 percent of the loans in our data are secured. For

these loans, the average ratio of collateral value to loan amount is 3.5. This high average ratio is partly

driven by the indivisibility of some of the pledged assets (e.g., commercial and residential real estate). A

wide variety of assets are pledged as collateral. Nine percent of collateralized loans are secured by

deposits in the same or another financial institution, almost four percent are secured by bank guarantees

(e.g., letters of credit), and two percent with securities (stocks or bonds). Movable firm assets (such as

accounts receivable, inventory, crops, properties, tools, machines and equipment) are frequently pledged

as collateral and are distinguished into creditor- or debtor-held. Creditor-held collateral indicates a

possessory security on the firm’s movable assets. In such cases, the assets are typically stored in a

warehouse on the behalf of the creditor. However, depending on the type of the asset and its importance

for the operation of the firm, a warehouse can also be set up at the firm’s premises to control access to the

assets and makes sure that the appropriate maintenance is done. For our sample, almost 16 percent of

collateralized loans are secured by creditor-held collateral, while almost 25 percent are secured by debtor-

held collateral. Real estate is also a frequent form of collateral -- as 20 percent of collateralized loans are

secured by residential real estate and almost nine percent by commercial real estate. Finally, almost 14

percent of collateralized loans are secured with endorsements from deposit warehouses backed by the

deposit of commodities (known as “Bonos de Prenda” or “Collateral Bonds”) and two percent by

vehicles.

        Table 3 provides summary statistics for secured and unsecured loans as well as for each collateral

type separately. Overall, the distribution of firms with respect to their legal structure is very similar

between secured and unsecured loans. With respect to repayment problems, recent past delinquencies are

more frequent among the borrowers of secured loans. Surprisingly, this is not true for recent defaults. On

average, borrowers of secured loans have shorter relationships with their banks – consistent with

                                                      7
collateral being pledged to mitigate information asymmetries between borrowers and lenders. With

respect to the loan characteristics, secured loans are on average larger than unsecured loans, have longer

maturities, and risk premiums that are smaller by about 80 basis points. The other loan characteristics are

very similar between the two groups. It terms of ex post performance, the incidence of repayment

problems (overdue payments or default) is larger among secured loans, suggesting that riskier borrowers

are more often asked to pledge collateral and that on average collateral does not offset the higher ex ante

risk.

        When comparing the loans under each collateral type with the average secured loan, some

interesting patterns emerge. Sole proprietorships are more likely to pledge deposits, residential real estate

or collateral bonds as collateral. Partnerships, instead, are more likely to pledge creditor-held collateral,

while corporations are more likely to pledge bank guarantees, securities, and debtor-held collateral.

Loans secured by securities or collateral bonds have a substantially higher incidence of recent

delinquencies than the average secured loan. The average relationship length is shorter for loans secured

by securities, residential real estate, collateral bonds, and vehicles. Loans secured by commercial real

estate or vehicles are more like to have installments and longer maturities, while the opposite is true for

loans secured with bank guarantees and creditor-held collateral.            The average risk premium is

substantially lower for loans secured with bank guarantees and creditor-held collateral. Instead, loans

secured with residential real estate have substantially higher premiums than the average secured loan.

The value-to-loan ratios are higher among loans secured by commercial and residential real estate, likely

due to the indivisibilities that characterizes these types of assets. Finally, the incidence of ex post

performance problems is substantially lower among loans secured by deposits, bank guarantees, and

securities and it is higher for loans secured by commercial real estate or vehicles. When looking at the

average amount due or written off as a percentage of the loan amount, loans secured by deposits,

securities, collateral bonds, and vehicles have lower ratios. Overall, these results suggest that there is

substantial heterogeneity with respect to the loan and firm characteristics of loans secured by different

assets, suggesting that controlling for such differences is important for our purposes.

                                                      8
        Next, we categorize these collateral types along three economic dimensions: (1) liquidity, (2)

divertability; and (3) ownership. An asset is considered liquid if it can be converted into cash quickly

without substantial discount on their price. Liquid is an indicator variable that takes a value of one for

collateral identified as either: Pledged Deposits, Bank Guarantees, or Securities. Other things being

equal, more liquid assets reduce the bank’s loss in the event of default and thus should carry lower risk

premiums. Asset divertability is also an important factor. Pledged assets that are less susceptible to

borrower agency problems are better able to mitigate moral hazard incentives and the bank’s losses in the

event of default. The variable NonDivertable takes a value of one for loans secured by the three liquid

assets defined above as well as for loans secured by Creditor-Held assets (i.e., movable firm assets that

are in the control of the bank during the term of the loan) and Collateral Bonds. Other things being equal,

loans backed by non-divertable assets should carry lower risk premiums. Most of the assets observed in

the data are expected to be owned by the firm. However, assets or other forms of collateral pledged from

outside of the firm may be act to increase equity of the firm and hence reduce observed firm risk (ceteris

paribus). Such collateral is indicated by the dummy variable Outside. In our data, we associate Outside

with two types of collateral: Bank Guarantees and Residential Real Estate pledged by corporations.

Residential real estate loans are assumed to be backed by real property owned by the firm’s principal

shareholder and, in the case of corporations, such assets would not otherwise be attachable in the event of

bankruptcy.   Table 4 summarizes our definitions of the three key collateral characteristics: Liquid,

NonDivertable, and Outside collateral.



III. Empirical Analysis

        Our empirical tests explore the relationship between loan risk premiums and the incidence of

collateral – with a particular focus on collateral types and collateral characteristics. Regressions include

control variables aimed at capturing important borrower- and loan-level variation as well as borrower,

bank, and time fixed effects (and sometimes interactions of these effects). Our empirical models, which

are each estimated using OLS, can be summarized as:

                                                     9
    Risk_Premiumijkt = f(Collateralijkt, Borrowerijkt, Loanijkt,αj, δk, γt )                                     (1)

    Risk_Premiumijkt = g(Collateral Typesijkt, Borrowerijkt, Loanijkt,αj, δk, γt)                                (2)

      Risk_Premiumijkt = h(Collateralijkt, Collateral Characteristicsijkt, Borrowerijkt, Loanijkt,α,, δk, γt )     (3)



where i, j, k, and t index loans, borrowers, banks, and time, respectively.

          In equations (1) – (3), Risk_Premium is defined as the loan interest rate (at origination) minus the

rate on U.S. Treasury securities of comparable maturity. The key exogenous variables are those reflecting

collateral pledges. Consistent with the extant literature, we first relate loan risk premiums to a simple

indicator of whether the loan was collateralized – Collateral. We then repeat the experiment replacing

the collateral indicator with a vector of collateral types (described above): Collateral Types = Pledged

Deposits, Bank Guarantees, Securities, Creditor-Held, Debtor-Held, Residential Real Estate, Commercial

Real Estate, Collateral Bonds, and Vehicle. Finally, we study variation in loan risk using Collateral plus

our three derived collateral characteristics: Collateral Characteristics = Liquid, NonDivertible, and

Outside.

          From a theoretical perspective, the measured effect of collateral on borrower risk is ambiguous.

Under the ex post theories, collateral is required of observably riskier borrowers. While observably

riskier borrowers should be expected to pay higher interest rates (“selection effect”), the fact that

collateral is pledged should mitigate ex post agency problems and reduce the bank’s loss given default

(“mitigation effect”).7      The predictions of the ex ante private information theories reinforce this

“mitigation effect” since this second set of theories posits that it is actually unobservably safer borrowers

who pledge collateral more often and hence pay lower interest rates. As a result, a positive measured

effect of collateral on loan risk premiums would suggest a net empirical dominance of the ex post

7
  The effective priority of secured debt in bankruptcy mitigates incentives for moral hazard (e.g., it reduces
asset/project substitution and prevents borrowers from obtaining additional debt which jeopardizes the lender’s
claims) and reduces the lender’s loss given default (e.g., by increasing the seniority of secured debt over unsecured
debt and by facilitating the repossession of the property and thus reducing foreclosure costs). Hence, all else equal,
the effective priority of secured debt should lead to smaller loan rate premiums (Smith and Warner 1979a, 1979b).

                                                          10
theories. By contrast, a negative measured effect would suggest either a mitigating effect of collateral

under the ex post theories, the net empirical dominance of the ex ante private information theories, or

both. Finally, as discussed above, different collateral types and characteristics may be associated with

systematically higher or lower loan risk premiums.

          The vector Borrowerijkt accounts for differences in firm and relationship characteristics such as

legal structure, past loan performance problems, the length of a bank-borrower relationship, industry, and

region.    We use a set of dummy variables indicating the legal structure of the firm: Partnership,

Corporation, and Other (Sole Proprietorship is the omitted group).            The variables Recent Prior

Delinquency and Recent Prior Default indicate whether the firm has had a loan delinquency or default in

the prior 12 months, respectively. Relationship Length indicates the length of a bank-firm relationship

and it is equal to the natural logarithm of one plus the number of months we observe the bank and

borrower in a credit relationship. Industry is a set of dummy variables for 19 industry classifications (like

the SIC or NAICS codes). Region is a set of dummy variables that indicate the location from which the

bank originated the loan. This includes nine regions in Bolivia as well as Argentina, Paraguay, Panama,

and the United States.

          The empirical specification includes several other control variables. For collateralized loans, we

include the ratio of the reported market value of the collateral to the loan amount, or Value-to-Loan Ratio.

This ratio is equal to zero for unsecured loans. Installment is a dummy variable equal to one if the

contract is an installment loan rather than a discount loan.

          Bank and time (month-year) fixed effects are also included in the model, represented by the

scalars δk and γt, respectively. Bank fixed effects should capture any systematic differences in bank

propensities to require collateral – and/or specific types of collateral – for their commercial loans. The

time fixed effects are intended to account for temporal differences in required collateral related to the

business or credit cycle. In some more conservative specifications, we also include borrower fixed effects

interacted with quarterly time fixed effects to capture time-varying firm characteristics, and thus more

accurately control for unobserved borrower heterogeneity.

                                                     11
IV. Results

        Table 5 provides some baseline results. Columns I-III present results including only the collateral

variables along with the region, bank, and time fixed effects. Columns IV-VI additionally then control

for several borrower, relationship and loan attributes, including region and industry fixed effects. Here

we find a negative overall relationship between loan rate premiums and collateral pledges. This is

consistent with either a net mitigating effect of collateral under the ex post theories, the net empirical

dominance of the ex ante private information theories, or both. Furthermore, all but one type of collateral

pledge maintain this consistent negative relationship with loan risk premiums, although magnitudes vary.

The one surprising exception is Residential Real Estate, which is found to be associated with higher loan

risk premiums. We believe that this surprising result may be due to unobserved borrower heterogeneity –

an issue we explore further below.

        Similar results carry over when we look at the three collateral characteristics.         Collateral

perceived to be either Liquid or NonDivertible is associated with lower loan risk premiums relative to

general collateral, while Outside collateral – consisting of Residential Real Estate pledged by

corporations and Bank Guarantees – is associated with higher risk premiums. Loans secured with Liquid

or NonDivertible collateral carry lower risk premiums than unsecured loans. For example, in Column VI,

the combined coefficients of Collateral and Liquid and Collateral and NonDivertible are negative and

statistically significant in both Columns III and VI. By contrast, loans secured by Outside collateral

appear carry higher risk premiums compared to unsecured loans as the combined coefficients of

Collateral and Outside are positive and statistically significant in both Columns III and VI.

        Turing to the control variables, we find that sole proprietorships carry the highest loan risk

premiums, as the coefficients for Partnership, Corporation, and Other are each negative and statistically

significant. These findings may be indicative that sole proprietorships tend to be smaller, younger, and/or

more opaque firms. We also find that loan risk premiums are (not surprisingly) very strongly positively

related to recent borrower defaults and delinquencies. Risk premiums are also found to consistently

                                                    12
increase in the length of the bank-borrower relationship, consistent with hold-up problems in bank-

borrower relationships. Finally, Installment loans and the Value-to-Loan Ratio are each positively related

to loan risk premiums.

        In Table 6 we explore the loan risk premium regressions further by including additional fixed

effects. Columns I-III extend the model by including fixed effects for those firms that received more than

one loan during the sample. In this specification we drop all time-invariant firm characteristics (i.e., the

dummy variables indicating the firm’s legal structure and the industry fixed effects). Next, in Column

IV-VI we replace the firm fixed effects with firm-quarter-year fixed effects. Interacting firm fixed effects

with quarterly time dummies allows us to better disentangle the effect of collateral on the loan risk

premiums from otherwise unobserved borrower time-varying characteristics. In these specifications, we

essentially identify parameters based only on loans to borrowers that received more than one loan in a

given quarter.    Separate monthly time dummies are also included to account for changes in

macroeconomic conditions. Finally, in Columns VII-IX, we go a step further to replace the firm-quarter-

year fixed effects with firm-quarter-year-bank fixed effects. Identification of parameters in this case is

obtained by using only loans originated in the same quarter from the same bank.

        In Table 6, we again find a negative overall relationship between loan rate premiums and

collateral pledges. This negative relationship also carries over to all types of collateral, although

statistical significance varies some across specifications. This inconsistency is likely driven by

significantly reduced degrees of freedom in the parameter estimation and the parsing out of

extraneous effects. Three types of collateral are nevertheless consistently negatively related to

loan risk premiums: Pledged Deposits, Creditor-Held Assets, and Commercial Real Estate. With

respect to collateral characteristics, Liquid collateral consistently receives a discount, while

Outside collateral requires a premium. Interestingly, when firm-quarter and firm-quarter-bank

dummies are included in our empirical specification, prior payment problems, relationship

length, and the type of loan all become statistically insignificant in terms of explaining loan risk

                                                    13
premiums.



V. Additional Evidence

        The data allow us to conduct a very granular statistical examination of the relationship between

loan risk premiums and collateral types and characteristics. However, some other studies in this literature

have also looked at the link between loan risk and collateral using measures of ex post loan performance

to surmise whether the ex ante private information theories or the ex post incentive conflict models

dominate empirically. Jimenez and Saurina (2004) and Berger, Frame, and Ioannidou (forthcoming) both

find that measures of ex post nonperformance (default and/or delinquency) are positively associated with

collateral pledges.

        For     comparative      purposes,      we     estimate   similar    empirical   specifications     using

Ex_Post_Nonperformanceijt, which indicates whether the loan eventually becomes delinquent or defaults.

As above, this measure is separately regressed on a dummy variable indicating that collateral was

pledged, the set of collateral types, and the set of collateral characteristics. These regressions also control

for the ratio of the collateral value to loan amount, the length of the banking relationship, loan- and firm-

level control variables, and bank and time fixed effects as summarized below:



Ex_Post_Nonperformanceijkt = f(Collateralijkt, Borrowerijkt, Loanijkt, ,αi, δk, γt )                      (4)

Ex_Post_Nonperformanceijkt = g(Collateral Typesijkt, Borrowerijkt, Loanijkt, ,αi, δk, γt)                 (5)

Ex_Post_Nonperformanceijkt = h(Collateralijkt, Collateral Characteristicsijkt, Borrowerijkt,

                                   Loanijkt, ,αi, δk, γt)                                                 (6)



where i, j, k, and t again index loans, borrowers, banks, and time, respectively. An important limitation of

this analysis relative to the analysis in the previous section is that we cannot control for unobserved




                                                            14
borrower heterogeneity that may be correlated with collateral pledges. The reason is that we have very

few nonperformance observations that are repeated for individual borrowers.

        Table 7 presents the results for ExPost_Nonperformanceijt in terms of the marginal effects

produced from Probit estimation. Columns I-III present results including only the collateral variables

along with the region, bank, and time fixed effects. Columns IV-VI additionally control for several

borrower, relationship and loan attributes, including region and industry fixed effects. Note that for this

analysis, we drop all loans that do not mature before the end of the sample (December 2003); thereby

leaving 29,485 bank loans. Since this has the effect of reducing the average loan maturity in our sample,

we also eliminate all loans originated during the last six months of the sample (July – December 2003) –

further reducing the sample to 28,758 loans.

        In Columns I and IV, collateral is positively associated with ex post delinquencies or defaults,

consistent with net empirical dominance of the ex post theories.           Interestingly, there is significant

variation in the relationship between loan performance and collateral types (Columns II and V). Home

Mortgages, Commercial Real Estate, Debtor-Held, and Vehicles are all positively associated with

Ex_Post_Nonperformance, while Bank Guarantees and Pledged Deposits are negatively related. Based

on the results in Tables 5 and 6, it is possible that the result for Residential Real Estate reflects selection

– i.e., riskier borrowers pledge such assets. Debtor-Held assets are subject to greater moral hazard than

otherwise similar assets controlled by creditors. Presumably Bank Guarantees are only provided to the

most creditworthy borrowers (selection), while Pledged Deposits provide tremendous security for bank

lenders by virtually eliminating moral hazard in cases where the deposits exceed the loan balance.

Consistent with these results, we see in Columns III and VI that loans collateralized by Liquid and/or

NonDivertible assets perform significantly better than other collateralized loans. Presumably this arises

from some combination of higher quality borrowers pledging such assets and the fact that these assets

better address the agency problem.

        Turning to the control variables, we see that partnerships suffer ex post loan nonperformance

problems more often than other corporate forms. We also see that past performance is indeed indicative

                                                      15
of future performance as the coefficient on Recent_Prior_Delinquency is positive. Finally, installment

loans are associated with weaker loan performance.



VI. Conclusions

        Economic theory explains collateral as an attempt to reduce agency costs or contracting frictions

in the presence of asymmetric information. One set of theoretical models focuses on ex ante private

information and suggests that collateral may allow lenders to sort observationally equivalent loan

applicants through signaling. A second set of theoretical models motivates collateral as part of an optimal

debt contract by invoking ex post frictions, most notably moral hazard, which predicts that observably

riskier borrowers are more likely to be required to pledge collateral. Unfortunately, the theories are

difficult to directly test empirically, but rather one can only surmise whether the ex ante private

information theories or the ex post incentive conflict models dominate empirically.

        This paper contributes to the literature exploring the empirical relationship between collateral and

borrower risk using detailed commercial loan-level data provided by a national credit registry.

Specifically, we relate ex ante loan risk premiums to indicators of collateral in general, various collateral

types, and the three key collateral characteristics of liquidity, divertibility, and outside/inside status,

holding constant a number of bank, borrower, and loan attributes. Prior research on collateral types and

characteristics is quite limited. Our focus on multiple types and three key collateral characteristics jointly

is novel to the literature and yields some interesting results. Further, our ability to use multiple loans to

the same borrower in the same quarter allows us to more credibly identify collateral effects as distinct

from unobserved borrower heterogeneity.

        We document a negative relationship between loan risk premiums and collateral.                   This

relationship is confirmed for all types of collateral in the data – except for residential real estate. A more

detailed examination suggests that this latter result is a consequence of riskier commercial borrowers

pledging their homes as collateral.     We also find that liquid and non-divertible collateral generate

significant discounts in loan risk premiums, although outside collateral is associated with higher

                                                     16
premiums, presumably due to a selection effect in which outside collateral is more often required for

riskier borrowers. Additional analysis of ex post loan performance documents a positive relationship with

collateral overall, but one that varies by collateral type. Liquid and non-divertible collateral is found to

reduce the probability of ex post nonperformance, although outside collateral is positively related to

nonperformance consistent with riskier borrowers being required to pledge this type of collateral.




                                                    17
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                                                  19
                                            Table 1
                  Summary Statistics for Commercial Banks Operating in Bolivia
This table provides summary statistics on all commercial banks that were active in Bolivia between March 1999 and
December 2003. Assets is equal to the average value of total assets in millions of US$ during the sample period.
Deposits Share is equal to average ratio of bank deposits to the total deposits in the banking system. Similarly,
Loans Share is equal to the average ratio total bank loans to the total loans in the banking system. The Capital Ratio
reports the average ratio of total capital (Tier 1+Tier 2) to total risk-weighted assets. The NPL Ratio is equal to each
bank’s average ratio of nonperforming loans (delinquent of at least 30 days) to total loans. Ownership indicates
whether a bank is foreign- or domestically-owned and for foreign-owned whether it is a branch or subsidiary (B or
S). Banks for which at least 50 percent of their equity is foreign owned are defined as Foreign.
Bank Name                           Assets      Deposits Share    Loans Share    Capital Ratio   NPL Ratio   Ownership
Banco Santa Cruz                   859.138         0.183             0.161         18.276         0.168      Foreign (S)
Banco Industrial                   677.694         0.127             0.151         12.504         0.097       Domestic
Banco Nacional de Bolivia          621.061         0.149             0.139         11.343         0.110       Domestic
Banco Mercantil                    598.541         0.142             0.125         12.076         0.091       Domestic
Banco de Crédito de Bolivia        591.024         0.134             0.126         13.985         0.130      Foreign (S)
Banco de la Unión                  450.655         0.088             0.104         12.479         0.166       Domestic
Banco Económico                    287.374         0.062             0.067         15.074         0.099       Domestic
Citibank                           265.291         0.044             0.047         18.835         0.312      Foreign (B)
Banco Ganadero                     205.477         0.042             0.046         11.888         0.105       Domestic
Banco Solidario                     95.932         0.019             0.024         18.346         0.103      Foreign (S)
Banco do Brasil                     31.771         0.005             0.003         54.374         0.071      Foreign (B)
Banco de la Nación Argentina        28.649         0.004             0.006         36.476         0.290      Foreign (B)
ABN Amro                            22.341         0.003             0.003         42.520         0.050      Foreign (B)




                                                          20
                                                       Table 2
                                           Variables and Summary Statistics
The table reports the notation and definitions of variables used in the analysis, and summary statistics for all loans in the
sample. The summary statistics for the Loan to Value Ratio and the various types of collateral are calculated for the
sample of loans that are secured. The summary statistics for ExPost_Nonperformance and Loss Given Default use the
number of loans that matured before the end of the sample period. For Loss Given Default the summary statistics are
calculated for loans with Loss Given Default greater than zero.
Variables                                                      Description                                      Obs      Mean      St. Dev.
Firm characteristics
Sole Proprietorship        Equals one if the firm is a sole proprietorship, and zero otherwise                  28,322     0.126      0.332
Partnership                Equals one if the firm is a partnership (i.e., all or some partners have unlimited   28,322     0.146      0.353
                           liability), and is zero otherwise
Corporation                Equals one if the firms is a corporation (i.e., all or some partners have            28,322     0.707      0.455
                           limited liability), and is zero otherwise
Other                      Equals one if the firm is a public company, a municipality, or a cultural, sport,    28,322     0.021      0.143
                           religious associations, and is zero otherwise
Recent Prior Default       Equals one if the borrower had defaulted on a loan anytime in the previous 12        28,322     0.003      0.052
                           months with any lender, and zero otherwise
Recent Prior Delinquency Equals one if the borrower had overdue payments of at least 30 days with               28,322     0.212      0.409
                           any bank in the previous 12 months, and zero otherwise
Rel_Length                 Length of bank-firm relationship in months                                           28,322    22.670     15.767
Loan characteristics
Installment                Equals one if an installment loan and zero if a discount loan                        28,322      0.457   0.498
Loan Amount                Loan amount at loan origination in US dollars                                        28,322   148,745 436,091
Maturity                   Number of months between loan origination and maturity                               28,322     11.097  14.546
Interest Rate              Annual contractual interest rate at loan origination                                 28,322     13.539   2.845
Loan Risk Premium          Interest rate minus U.S. Treasury Bill rates of matched maturity                     28,322      9.507   2.557
Collateral                 Equals one if collateral was pledged at loan origination and zero otherwise          28,322      0.177   0.381
   Value-to-Loan Ratio     Value of collateral to loan amount at loan origination                                5,005      3.495  18.503
   Types of Collateral
   Pledged Deposits        Equals one if deposits were pledged, and is zero otherwise                            5,005     0.090      0.287
   Bank Guarantees         Equals one if bank guarantees or letters of credit were pledged, and is               5,005     0.037      0.188
                            zero otherwise
   Securities              Equals one if bonds or stocks were pledged, and is zero otherwise                     5,005     0.022      0.146
   Creditor-Held Assets    Equals one if there is a possessory security on the firm's movable assets (e.g.,      5,005     0.157      0.364
                           inventory, crops, properties, tools, and equipment), and is zero otherwise
   Debtor-Held Assets      Equals one if there is a non-possessory security on the firm's movable assets         5,005     0.248      0.432
                           (e.g., a/cs receivable, inventory, crops, properties, tools, and equipment),
                           and is zero otherwise
   Residential Real Estate Equals one if a residential real estate is pledged, and is zero otherwise             5,005     0.201      0.400
   Commercial Real Estate Equals one if a commercial real estate is pledged, and is zero otherwise               5,005     0.089      0.284
   Collateral Bonds        Equals one if a loan is secured with endorsements from deposit warehouses             5,005     0.135      0.342
                           backed by the deposit of commodities ("Bonos de Prenda").
   Vehicles                Equals one if vehicles were pledged, and is zero otherwise                            5,005     0.023      0.149
Ex Post Loan Performance
ExPost_Nonperformance Equals one if a loan is 30+ days overdue anytime after origination or if it is            25,983     0.054      0.227
                           downgraded to the default status (a rating of 5) and zero otherwise
Loss Given Default         Equals the amount overdue or written off at the last time a loan is observed          1,400     0.773      0.318
                           in the sample devided by the loan amount at loan origination




                                                                    21
                                                              Table 3
                         Summary Statistics for Unsecured and Secured Loans and for Each Type of Collateral
The table reports summary statistics for unsecured and secured loans separately and for each type of collateral. The summary statistics for ExPost_Nonperformance
and Loss Given Default use the number of loans that matured before the end of the sample period. For Loss Given Default the summary statistics are calculated for
loans with Loss Given Default greater than zero.
                               Unsecured Secured       Pledged    Bank     Securities Creditor- Debtor- Resid. Real Comm. Real Collateral Vehicles
                                                       Deposits Guarantees              Held     Held     Estate      Estate    Bonds
Firm Characteristics
 Sole Proprietorships             0.125       0.129      0.237      0.000      0.064       0.005     0.065      0.238       0.187       0.167      0.097
 Partnerships                     0.141       0.167      0.100      0.076      0.083       0.341     0.102      0.196       0.120       0.142      0.230
 Corporations                     0.714       0.674      0.617      0.918      0.835       0.653     0.825      0.550       0.623       0.588      0.655
 Other                            0.019       0.030      0.046      0.005      0.018       0.001     0.008      0.016       0.068       0.102      0.018
 Recent Prior Default             0.046       0.006      0.000      0.000      0.000       0.003     0.006      0.012       0.002       0.010      0.000
 Recent Prior Delinquency         0.204       0.252      0.142      0.266      0.468       0.262     0.309      0.173       0.129       0.381      0.195
 Relat. Length (in months)       23.199      20.206     20.604     21.337      14.018     23.206    22.129     17.650       20.605     17.956     15.372
Loan Characteristics
 Installment                      0.464       0.425      0.343      0.103      0.477      0.205     0.448       0.513       0.817       0.317      0.850
 Loan Amount                      122,086    272,943     92,900     934,888    398,176   306,212   417,994       98,202      247,076   201,422      53,811
 Maturity (in months)            10.386      14.409      9.499      4.889      18.113     7.996    10.252      17.417       44.504      7.447     33.027
 Interest Rate                   13.679      12.886     12.428     10.154      14.116    10.848    12.670      14.527       13.776     13.313     13.935
 Loan Risk Premium                9.651       8.839      8.646      6.631      9.695      6.750     8.809      10.478       9.427       9.068      9.194
 Value-to-Loan Ratio              0.000       3.495      2.719      2.322      2.485      2.717     3.635       4.633       5.377       2.380      2.531
Ex-Post Loan Performance
 Ex-Post Nonperformance           0.053      0.088      0.021       0.030      0.059      0.100     0.109       0.090       0.112       0.074      0.143
 Loss Given Default               0.766      0.791      0.667       0.971      0.678      0.781     0.801       0.849       0.826       0.685      0.688
Observations                     23,317      5,005       452         184        109        786      1,239          1,004     443         675        113




                                                                              22
                                         Table 4
              Definitions of Liquid, Non Divertable, and Outside Collateral


Type of Collateral                           Liquid      Non Divertable       Outside
Pledged Deposits                               1               1                 0
Bank Guarantees                                1               1                 1
Securities                                     1               1                 0
Creditor-Held                                  0               1                 0
Debtor-Held                                    0               0                 0
Residential Real Estate_Corporations           0               0                 1
Residential Real Estate_Non Corporations       0               0                 0
Commercial Real Estate                         0               0                 0
Collateral Bonds                               0               1                 0
Vehicles                                       0               0                 0




                                           23
                                                   Table 5
                                     Determinants of Loan Risk Premiums
This table reports OLS regressions for Risk_Premiumijt, which is defined as the loan interest rate at loan origination
minus the rate of U.S. Treasury bill with comparable maturities. Standard errors are corrected for heteroskedasticity
and reported between brackets. ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively.
                                                I             II           III           IV             V            VI
               Collateral
               Collateral                   -0.615***                   -0.431*** -0.667***                       -0.528***
                                                [0.044]                     [0.062]   [0.044]                         [0.060]
               Collateral Types
               Pledged Deposits                           -1.701***                                 -1.813***
                                                              [0.123]                                   [0.126]
               Bank Guarantees                            -1.193***                                 -1.052***
                                                              [0.221]                                   [0.221]
               Securities                                 -0.726***                                 -0.844***
                                                              [0.183]                                   [0.181]
               Creditor-Held Assets                       -0.974***                                 -0.969***
                                                              [0.097]                                   [0.096]
               Debtor-Held Assets                         -0.835***                                 -0.773***
                                                              [0.089]                                   [0.086]
               Residential Real Estate                     0.723***                                  0.561***
                                                              [0.086]                                   [0.086]
               Commercial Real Estate                     -0.389***                                 -0.567***
                                                              [0.121]                                   [0.120]
               Collateral Bonds                           -0.350***                                 -0.391***
                                                              [0.082]                                   [0.083]
               Vehicles                                        -0.165                                 -0.322**
                                                              [0.157]                                   [0.163]
               Collateral Characteristics
               Liquid                                                   -1.011***                                 -1.088***
                                                                            [0.117]                                   [0.119]
               NonDivertable                                            -0.228***                                    -0.148*
                                                                            [0.086]                                   [0.084]
               Outside                                                   0.943***                                  1.124***
                                                                            [0.103]                                   [0.102]
               Borrower Characteristics
               Partnership                                                            -0.302***     -0.278***     -0.309***
                                                                                          [0.049]       [0.048]       [0.048]
               Corporation                                                            -0.673***     -0.628***     -0.710***
                                                                                          [0.038]       [0.038]       [0.038]
               Other                                                                  -0.251***     -0.244***     -0.260***
                                                                                          [0.082]       [0.081]       [0.081]
               Recent Prior Default                                                    0.898***      0.724***      0.857***
                                                                                          [0.234]       [0.229]       [0.236]
               Recent Prior Delinquency                                                0.423***      0.429***      0.427***
                                                                                          [0.030]       [0.030]       [0.030]
               Relationship Length                                                      0.034**      0.044***       0.040**
                                                                                          [0.016]       [0.016]       [0.016]
               Loan Characteristics
               Installment                  0.076***      0.024    0.037 0.072***     0.029   0.037
                                               [0.027]  [0.027]  [0.027]    [0.026] [0.026] [0.026]
               Value-to-Loan Ratio          0.006*** 0.005*** 0.005*** 0.005*** 0.004*** 0.005***
                                               [0.001]  [0.001]  [0.001]    [0.001] [0.001] [0.001]
               Fixed Effects
               Region                        Included      Included      Included  Included          Included      Included
               Bank                          Included      Included      Included  Included          Included      Included
               Month-Year                    Included      Included      Included  Included          Included      Included
               Industry                                                            Included          Included      Included
               R-squared                         0.352        0.3631        0.3586    0.3903            0.3999        0.3978
               Observations                    28,252        28,252        28,252    28,252            28,252        28,252


                                                              24
                                                     Table 6
                                       Determinants of Loan Risk Premiums
This table reports OLS regressions for Risk_Premiumijt, which is defined as the loan interest rate at loan origination
minus the rate of U.S. Treasury bill with comparable maturities. Standard errors are corrected for heteroskedasticity
and reported between brackets. ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively.
                                 I            II            III          IV             V             VI           VII          VIII           IX
Collateral
Collateral                   -0.376***                   -0.265*** -0.466***                       -0.444*** -0.541***                      -0.487***
                                 [0.042]                     [0.055]   [0.060]                         [0.084]   [0.078]                        [0.127]
Collateral Types
Pledged Deposits                           -1.841***                                -1.539***                                 -1.102***
                                               [0.142]                                   [0.242]                                  [0.217]
Bank Guarantees                            -0.522***                                      -0.229                               -0.649**
                                               [0.185]                                   [0.201]                                  [0.263]
Securities                                 -0.650***                                  -0.491**                                     -0.599
                                               [0.201]                                   [0.229]                                  [0.376]
Creditor-Held Assets                       -0.257***                                -0.527***                                 -0.742***
                                               [0.089]                                   [0.115]                                  [0.139]
Debtor-Held Assets                               -0.09                              -0.278***                                 -0.495***
                                               [0.072]                                   [0.104]                                  [0.179]
Residential Real Estate                         -0.085                              -0.423***                                      -0.241
                                               [0.082]                                   [0.121]                                  [0.162]
Commercial Real Estate                     -0.497***                                -0.716***                                   -0.521**
                                               [0.115]                                   [0.197]                                  [0.238]
Collateral Bonds                                -0.083                                  -0.189*                                    -0.183
                                               [0.078]                                   [0.103]                                  [0.125]
Vehicles                                   -0.580***                                  -0.612**                                      -0.49
                                               [0.205]                                   [0.283]                                  [0.307]
Collateral Characteristics
Liquid                                                   -1.247***                                 -0.691***                                -0.522***
                                                             [0.121]                                   [0.176]                                  [0.193]
NonDivertable                                                  0.075                                     0.079                                    0.024
                                                             [0.078]                                   [0.106]                                  [0.151]
Outside                                                   0.506***                                  0.436***                                    0.314*
                                                             [0.093]                                   [0.135]                                  [0.182]
Borrower Characteristics
Recent Prior Default          0.559**       0.506**       0.510**         -0.789        -0.765         -0.785       -0.507        -0.516         -0.52
                                [0.226]       [0.218]       [0.222]      [0.492]       [0.479]        [0.488]      [0.556]       [0.557]       [0.562]
Recent Prior Delinquency     0.166***      0.149***      0.157***          -0.14        -0.144         -0.138       -0.001         0.002             0
                                [0.034]       [0.034]       [0.034]      [0.098]       [0.097]        [0.098]      [0.094]       [0.093]       [0.093]
Relationship Length          0.071***      0.076***      0.075***          0.043         0.049           0.04       -0.072        -0.084        -0.077
                                [0.019]       [0.019]       [0.019]      [0.035]       [0.035]        [0.035]      [0.107]       [0.108]       [0.107]
Loan Characteristics
Installment                  -0.077*** -0.084*** -0.089***                 -0.019       -0.023         -0.025         0.004       -0.007        -0.003
                                 [0.025]   [0.025]   [0.025]              [0.035]      [0.035]        [0.035]       [0.038]      [0.038]       [0.038]
Value-to-Loan Ratio           0.003*** 0.003*** 0.003***               0.003***     0.003***       0.003***      0.001***          0.001      0.001**
                                 [0.000]   [0.001]   [0.000]              [0.001]      [0.001]        [0.001]       [0.000]      [0.000]       [0.000]
Fixed Effects
Region                        Included      Included      Included
Bank                          Included      Included      Included     Included      Included       Included
Month-Year                    Included      Included      Included     Included      Included       Included     Included      Included      Included
Firm                          Included      Included      Included     Included      Included       Included     Included      Included      Included
Firm*Quarter                                                           Included      Included       Included
Firm* Quarter*Bank                                                                                               Included      Included      Included
Adjusted R-squared               0.7037        0.7071        0.7065       0.8205        0.8217         0.8211       0.8673        0.8678        0.8708
Observations                    28,252        28,252        28,252       28,252        28,252         28,252       28,252        28,252        28,252




                                                                       25
                                                   Table 7
                                   Determinants of Ex Post Nonperformance
This table reports the marginal effects of Probit regressions for Ex Post Nonperformance, a dummy variable that
equals one if a loan is 30+ days overdue anytime after its origination or if it is downgraded to the default status (i.e.,
given a rating of 5). For continuous variables we report the effect for an infinitesimal change in each independent
variable and for dummy variables we report the estimated effect of a change from 0 to 1. P0 is the predicted
probability of ex post nonperformance, evaluated at the mean of all independent variables. ***, **, and * indicate
significance at the 1%, 5%, and 10%, respectively. The standard errors are corrected for heteroskedasticity.
                                                I            II            III           I            II            III
                Collateral
                Collateral                   0.031***                   0.055***      0.023***                   0.047***
                                                [0.005]                    [0.007]       [0.004]                    [0.006]
                Collateral Types
                Pledged Deposits                          -0.022***                                  -0.017**
                                                              [0.007]                                  [0.007]
                Bank Guarantees                           -0.025***                                -0.025***
                                                              [0.008]                                  [0.006]
                Securities                                      -0.01                                   -0.013
                                                              [0.018]                                  [0.014]
                Creditor-Held Assets                            0.014                                        0
                                                              [0.009]                                  [0.007]
                Debtor-Held Assets                         0.074***                                 0.055***
                                                              [0.011]                                  [0.010]
                Residential Real Estate                    0.042***                                 0.041***
                                                              [0.012]                                  [0.012]
                Commercial Real Estate                     0.073***                                 0.076***
                                                              [0.018]                                  [0.018]
                Collateral Bonds                              0.015*                                     0.004
                                                              [0.009]                                  [0.007]
                Vehicles                                      0.056*                                   0.070*
                                                              [0.032]                                  [0.036]
                Collateral Characteristics
                Liquid                                                  -0.029***                                -0.022***
                                                                            [0.004]                                  [0.005]
                NonDivertable                                           -0.022***                                -0.024***
                                                                            [0.004]                                  [0.003]
                Outside                                                       0.008                                    0.008
                                                                            [0.008]                                  [0.008]
                Borrower Characteristics
                Partnership                                                           0.017***     0.015***      0.016***
                                                                                         [0.006]      [0.006]       [0.006]
                Corporation                                                              0.006*       0.007*        0.006*
                                                                                         [0.004]      [0.004]       [0.004]
                Other                                                                          0        0.001         0.002
                                                                                         [0.009]      [0.009]       [0.009]
                Recent Prior Default                                                        0.03         0.03         0.029
                                                                                         [0.027]      [0.027]       [0.026]
                Recent Prior Delinquency                                              0.057***     0.057***      0.057***
                                                                                         [0.004]      [0.004]       [0.004]
                Relationship Length                                                       -0.001       -0.001        -0.001
                                                                                         [0.002]      [0.002]       [0.001]
                Loan Characteristics
                Installment                  0.017***     0.015***      0.014***      0.016***     0.014***      0.014***
                                                [0.003]      [0.003]       [0.003]       [0.003]      [0.002]       [0.002]
                Value-to-Loan Ratios          0.000**        0.000*              0       0.000*             0             0
                                                [0.000]      [0.000]       [0.000]       [0.000]      [0.000]       [0.000]
                Fixed Effects
                Region                       Included      Included      Included     Included      Included      Included
                Bank                         Included      Included      Included     Included      Included      Included
                Month-Year                   Included      Included      Included     Included      Included      Included
                Industry                                                              Included      Included      Included
                Pseudo R -squared               0.0959        0.1026        0.1021       0.1345        0.1415        0.1412
                P0                              0.0403        0.0395        0.0395       0.0353        0.0344        0.0344
                Observations                   25,363        25,363        25,363       25,352        25,352        25,352


                                                                  26

				
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