Do banks extract informational rents through collateral?

BIS Working Papers No 522
October 2015

This paper investigates if informational monopolies resulting from relationship lending and bank market concentration allow for rent extraction through collateral. Our identification strategy hinges on the notion that informational equalization shocks (such as equity IPOs) erode rent seeking opportunities, while competing theories do not rely on information asymmetries among lenders. Using a unique hand-collected database of 9,288 bank loans obtained by 649 listed Chinese firms, we find that collateral incidence is positively associated with relationship intensity and bank market concentration, while this effect is moderated for post-IPO loans. These results are obtained controlling for a large number of loan and firm characteristics, monetary policy variables and regional macroeconomic characteristics. We also demonstrate important cross-sectional variation among borrowing firms: rent extraction through collateral is significantly less pronounced for less risky firms. Our results hold for a battery of robustness tests, both included in the paper and in an Internet appendix (available upon request). Furthermore, we provide new evidence on the determinants of collateral in Chinese bank lending markets.

JEL classification: G21, L11

Keywords: Informational rents, collateral, relationship lending, market structure, IPOs, China