Premium
Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's SME Loan Market
Author(s) -
ONO ARITO,
UESUGI IICHIRO
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00239.x
Subject(s) - collateral , pledge , seniority , loan , collateralized debt obligation , business , incentive , cross collateralization , participation loan , monetary economics , commit , financial system , actuarial science , economics , non performing loan , finance , market economy , political science , law , database , computer science
This paper investigates the determinants of the use of collateral and personal guarantees in Japan's SME loan market. We find that firms' riskiness does not have a significant effect on the likelihood that collateral is used. We find, however, that main banks whose claims are collateralized monitor borrowers more intensively and that borrowers who have a long‐term relationship with their main banks are more likely to pledge collateral. These findings are consistent with the theory that the use of collateral is effective in raising the bank's seniority and enhances its screening and monitoring. This incentive effect for the bank becomes tenuous for personal guarantees.