We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.
The extent to which property rights are protected in a country is an important consideration in determining what loans are offered to firms, how these loans are structured, and how they are priced. Property rights protection affects a lender’s incentives to monitor and its ability to recontract. Declining credit quality often results in lenders raising interest rates, demanding more collateral, shortening loan maturity, and further restricting future activities. This recontracting is costly when property rights are poorly enforced. Poor enforcement lowers recovery rates and increases the time spent in repossessing collateral following default.
The choice of exchange rate regime is a perennial issue for policy makers. But, in the wake of the recent volatility in global capital markets, this issue has taken on special relevance for emerging markets. Recent exchange rate crises have led some to conclude that, in an environment of capital market volatility, more exchange rate flexibility is desirable.
REITs (Real Estate Investment Trusts) and CMBS (Commercial Mortgage-Backed Securities) are securitized real estate equity and debt representing claims on real property or commercial mortgages. In the last two decades, REIT and CMBS markets have grown very fast and become important asset classes. The National Association of Real Estate Investment Trusts (NAREIT) shows that the market capitalization outstanding of US REITs has increased from $8.7 billion at the end of 1990 to $438 billion at the end of 2006, and then decreased to $192 billion at the end of 2008 due to the financial crisis.
