Collateralization and distance

This paper examines how collateralization in small business lending varies with bank-borrower proximity. Our analysis establishes a robust inverse relationship between distance and collateral: Borrowers located in the vicinity of the bank face higher collateral requirements. The estimated relationship is independent of the allocation of decision-making authority within the lending organization, competitive pressure in the local credit markets, or risk rating of the borrower. Our findings seem consistent with the notion that distance reflects transaction costs associated with the assessment, inspection, and possible repossession of collateral.