Digital Technology, Legal Reforms, and Bank Lending

The introduction of online collateral auctions through legal reform has established a more efficient bankruptcy resolution mechanism. This technology-driven change has enhanced the ex-ante value of secured loans, influencing the supply, demand, and composition of bank lending. Using granular loan-level data and staggered Difference-in-Differences (DiD) estimations, we find a significant shift from unsecured to secured loans, particularly among private firms with greater fixed assets, stronger credit ratings, and higher reliance on external financing. Meanwhile, interest rates on unsecured loans rise, while those on secured loans remain unchanged. The effects are more pronounced in bank branches facing higher competitive pressures, where lenders expand credit to capitalize on the increased value of secured loans. Following the reform, banks increased secured lending, improved risk-adjusted interest earnings, and attracted more private-sector firms.