The Collateral Channel and Bank Credit

Abstract: We identify the firm-level and aggregate effects of collateral price shocks on business lending and investment — also known as the collateral channel — using detailed bank-firm-loan level data that allow us to observe the pledging of real estate collateral and to control for credit demand and supply conditions. At the firm level, a 1-percentage-point increase in collateral values leads to an increase of 12 basis points in credit growth, whereas the average elasticity of credit to collateral values in the cross-section of metropolitan statistical areas (MSAs) is seven times larger. Our estimates imply that as much as 37 percent of employment growth over the period from 2013 to 2019 can be attributed to the relaxation of borrowing constraints on bank-dependent borrowers.

Keywords: Collateral channel; Assets; Bank Credit;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2023-10

Volume: 23

Issue: 33