The Collateral Channel: Real Estate Prices and Firm Leverage∗

  • Sevcan Yeşiltaş
  • Published 2015

Abstract

Through the collateral channel, shocks to the value of real estate can have a significant impact on the firms’ borrowing capacity. In this paper, I provide evidence on this mechanism by using LTV ratio caps on mortgages in a number of European countries as policy shocks that affect real estate prices. I conduct a difference-in-difference exercise using a unique and comprehensive micro panel data covering both large firms and SMEs. This allows me to better identify and quantify the effects of policy shocks to the value of firm collateral by distinguishing them from local demand shocks and local general equilibrium effects. I find a significant collateral damage on firms’ balance sheets, a consequence of LTV policy shock, which in turn caused i) secured debt to decrease in firms with high collateral value more than in firms with low collateral value, and ii) trade credit use to increase in firms with high collateral value more than in firms with low collateral value. These findings document a new evidence on how firms adjust to shocks to the value of collateral through trade credit use. These findings also highlight that macroprudential policies in one sector–such as LTV ratio caps targeting household sector–might result in an unintentional consequence in another sector–such as collateral damage in corporate sector. This is an important caveat that policy makers should consider when implementing macroprudential policy. JEL-Codes: D22, E58, G21, G28, G30, G32, R30

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Cite this paper

@inproceedings{Yeilta2015TheCC, title={The Collateral Channel: Real Estate Prices and Firm Leverage∗}, author={Sevcan Yeşiltaş}, year={2015} }