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Keywords:

  • G21
  • collateral;
  • competition;
  • asymmetric information;
  • relationship banking

This paper investigates how the use of collateral (formal contracting), along with the market power of banks (which facilitates relational contracts), affects the availability of credit for business firms. Using loan data from the Spanish Credit Register, we show that the average credit quality of borrowers in a provincial market decreases with market concentration and the availability of collateral. Additionally, the marginal effect of each variable decreases with the higher values of the other variable. We also find that credit line interest rates increase with the availability of collateral, although the increase is lower for banks operating in more concentrated credit markets. Therefore, market power (relations) and collateral (formal contracting) act as substitutes to increase the availability of bank finance under asymmetric information.