We consider an economy with a large number of banks which lend to a continuum of risk neutral entrepreneurs, denoted by i. Banks have a positive and exogenous cost of issuing a unit of loan, R þ δ≡˜R, which is the sum of the cost of raising funds, R, and an intermediation cost δ. Each entrepreneur is endowed with an illiquid asset, Ai, which is uniformly distributed in the interval [0,Ā]. The asset (or part of it) can be used as loan collateral. We denote the fraction of Ai disclosed to the bank and employed as collateral as γi, with γi∈[0,1]. Hence, banks observe γiAi but not γi or Ai separately. The fraction of the asset that is hidden, (1−γi)Ai, is not observed by any other agent or hence by government.