Arun Gupta, Horacio Sapriza, and Vladimir YankovWe examine the firm-level and aggregate effects of the collateral channel using administrative bank-firm-loan level data. We introduce novel instrumental variables related to the efficiency of federal district bankruptcy courts and show their importance as predictors of collateral use and banks' expected losses given default across collateral types. Our estimates reveal that following increases in real estate values, firms that pledge real estate experience an expansion in bank credit, reductions in credit spreads, and an extension in the maturity of loans that allows for increases in firm leverage, capital expenditures, total assets, and sales. Unlike existing studies focused on publicly traded firms, the effects are economically important only for private, high bank-dependent borrowers and are not present for firms that borrow unsecured, even if those firms own real estate. The elasticity of bank credit to collateral values is substantially larger when estimated at the MSA level, which suggests significant credit multiplier effects. However, the sign and magnitude of the total aggregate effects on credit allocations and employment growth are heterogeneous across markets and depend on the size of the share of firms pledging real estate and the magnitude of the appreciation of real estate values.
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