Real estate pledgeability drives sectoral credit misallocation
A new Banque de France working paper by Aurélien Espic shows that differences in asset pledgeability cause sectoral credit misallocation. The study demonstrates that taxing debt of high-pledgeability firms while subsidizing less pledgeable sectors enhances overall economic welfare.
The collateral advantage of real estate
Using French firm-level data from Fiben and AnaCredit between 2019 and 2024, the study shows that firms holding pledgeable capital are structurally more leveraged.
Commercial real estate investors display a median mortgage ratio exceeding 50 percent, far above other non-financial sectors.
Controlling for firm characteristics, a one percentage point increase in the mortgage ratio is associated with a two to five basis point rise in leverage.
Moreover, investment by high-pledgeability firms responds significantly more to credit supply shocks.
A one standard deviation credit supply shock increases capital growth by 0.3 to 0.5 percentage points for fully collateralized firms, whereas firms without collateral show no significant investment response.
Rethinking credit intervention and welfare
Espic incorporates these empirical facts into a general equilibrium model distinguishing commercial real estate from less pledgeable capital goods.
Because real estate is easier to collateralize, its funding cost is lower, leading firms to accumulate it at lower expected returns.
This creates persistent capital misallocation across sectors during credit expansions.
Model simulations show that taxing debt of real estate firms by 80 basis points to fund a 40 basis point interest subsidy for less pledgeable firms improves overall economic welfare.
Targeting collateral, not individual firms
The paper highlights a critical flaw in broad credit policies that favor collateral-heavy sectors.
Focusing on asset pledgeability gives regulators a concrete handle to design macroprudential rules.
Taxing real estate debt during credit expansions provides an effective shield against capital misallocation.
Source: Capital Pledgeability and Credit Misallocation
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