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-leveldataandstaggeredDifference-in-Differences(DiD)estimations,we findasignificantshift fromunsecuredtosecuredloans,particularlyamongprivatefirmswithgreater fixedassets, stronger credit ratings, and higher reliance on external financing. Meanwhile, interest rates onunsecured loans rise, while those on secured loans remain unchanged. The effects are more pronounced in bankbranches facinghigher competitivepressures,where lenders expandcreditto capitalize onthe increased value of secured loans. Following the reform, banks increased secured lending, improved risk-adjustedinterest earnings, andattractedmoreprivate-sector firms.