Research paper examines treatment of SME collateral by banks

A research paper by James Carroll and Fergal McCann examines how banks in Ireland treat collateral provided by SMEs against loans, which is provided to mitigate against the risk of loan default. The research examines loan level data on lending to enterprise.

The research finds that:

• Banks are more likely to require collateral from riskier borrowers for larger loans. However, this collateral may not be successful in mitigating against loan default.
• Securing a loan by providing collateral does not appear to reduce the probability of a rating deterioration or loan default.
• However, providing security on riskier and larger loans does reduce banks’ Expected Loss and Risk Weighted Assets, both of which will improve the banks’ capital ratio.

The views presented in Research Technical Papers are those of the authors alone and do not necessarily represent the official views of the Central Bank of Ireland.

Research Technical Papers are published on the Central Bank’s website here.