| Abstract | Faced with the financing problem of small-medium enterprises (SMEs), China has attempted to establish as many as third party’s collateral institutions. In this paper, we study the design of collateral arrangements including: collateral fee rates, risk sharing, collateral capital requirements, types of collateral institutions and recollateral institution etc. According to our research, only under certain conditions can third party’s collateral arrangements tackle the financing problems of SMEs. Diversification, anti-collateral and linked-transactions are three means to improve financing conditions, but the most important way is efficient monitoring by collateral institutions, especially when it has relative advantage over the lender. In order to improve financing conditions of SMEs, China should rely more on efficient monitoring by banks not on excess development of collateral institutions, meanwhile relax rigid collateral supervision policies. Collateral institutions should be industry-specific, association or transaction-related type. |