Collateral policy of the central bank and corporate financing costs: Evidence from China

This paper proposes a model of collateral policy to study the impact of the expansion of collateral scope by central banks on corporate financing costs. Based on the theoretical model and a quasi natural experiment in China, this paper empirically tests the effect of the expansion of the collateral scope for Medium-Term Lending Facility (MLF) by the People's Bank of China on corporate financing costs. We find that this loosening of collateral policy in China can significantly reduce the credit spreads for enterprises by 45 bps and the loan financing costs for micro and small enterprises by 71 bps, respectively. After a series of robust tests, the impact of the loose collateral policy on corporate financing costs remains significant statistically and economically.

Automated summary

This paper proposes a model and conducts an empirical study to examine the impact of central banks' expansion of collateral scope on corporate financing costs. The results show that the loosening of collateral policy in China significantly reduces credit spreads and loan financing costs for enterprises.