Abstract
We design a geographical model of banking to examine the optimal use of alternative collateral types and lending technologies: transaction lending, asset-based lending and fixed asset lending. The optimal lending technology and collateral asset are shown to depend on the project quality and bank-borrower distance. Sometimes unsecured lending is optimal. Both loan interest and the share of secured loans may increase or decrease with the bank-borrower distance depending on the collateral type and lending technology. Finally we explore how credit scoring and deregulation intensify competition through distant multimarket banks. The change improves the welfare of borrowers. Asset-based lending with local firms offers a competitive advantage for small local banks.
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