The impact of guarantees on bank loan interest rates

This article analyses the role of guarantees on loan interest rates of Italian firms before and during the recent financial crisis. It improves on the existing literature by using explicit measure of collateral and personal guarantees and by modelling unobserved heterogeneity between low-level groups (banks) within a single nested panel data set. Our database covers the period 2006–2009 for a total of 560 339 firms and 214 banks. Our analysis shows that collateral guarantee affects the cost of credit for Italian firms by systematically reducing the interest rate of secured loans. This effect was larger during the crisis. Personal guarantees show no systematic effect on interest rates, but favour firms’ access to credit. Furthermore, guarantees are a more powerful instrument for riskier borrowers than for safer borrowers, i.e., the decrease in interest rates due to the presence of guarantees is larger for the former than for the latter.