Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms

We study the role of heterogeneous financial frictions in the transmission of monetary policy, using firm-bank matched administrative data for the U.S. We find that collateral heterogeneity in loan contracts shapes both the pricing and the quantity of credit in response to monetary policy shocks. Small and risky (leveraged) firms pledge mostly accounts receivable, inventory, and blanket liens as collateral, tying their borrowing capacity to procyclical earnings. Loan spreads on these collateralized facilities respond less to monetary policy shocks than spreads on unsecured loans. At the same time, because the value of this collateral itself moves procyclically, these firms' debt capacity expands during monetary easings and contracts during tightenings, so their borrowing and investment rise more during easings and fall more during tightenings than for other firms. Our micro estimates of this collateral-based debt-capacity channel are economically significant and can explain 77 percent of aggregate credit expansions and contractions.