Roman Law of Real Security

When the rules for the taking and enforcement of security are ‘cumbersome, inefficient and awkward', security may lose its essential economic function of mitigating risk for lendersTh⁰ This is the condition of the Roman law of real security according to a widely shared view in modern literature on Roman law.171 It is often added that flaws in real security were not a major problem, since personal security (guarantees, suretyships) was far more important in ancient Rome than real security.^² But in the archive of the Sulpicii we see that in ordinary commercial relationships personal security was used for small loans and real security for larger ones.^[141] ^{^[142] ^[143] ^[144] It is also hard to believe that the Roman law of real security was relatively insignificant when so many opinions of the jurists and imperial constitutions on pignus, hypotheca, and fiducia have survived.^⁴ The Roman law of security was highly sophisticated and versatile, allowing multiple charges, non-possessory security, and even floating charges.}

Since legal systems often adapt in reaction to impulses from their economic environment, the complexity of the Roman law of real security would suggest that pignus and fiducia did play a significant role in the Roman economy. In chapter 12 it will be shown that this role was generally a positive one. Its main weakness was lack of publicity, and even this weakness has often been exaggerated in modern literature.

Risk reduction

In their groundbreaking Yale Law Journal article Jackson and Kronman observed that ‘[t]o a considerable extent, the value of a security interest depends on the degree to which it insulates the secured party from the claims of the debtor's other creditors'.^⁵ The primary economic function of security is therefore risk reduction for the creditor.^⁶ In case of secured loans the risk concerned is that of non-payment of principal and interest at the agreed time.

The more this risk is reduced by taking security, the greater its value will be to the creditor. The risk manifests itself in particular when the debtor is insolvent. In that event creditors are likely to receive only a small portion of their claims, since the liquidation proceeds of the debtor's assets are usually significantly less than the aggregate amount of his debts. Under the principle of pari passu or paritas creditorum (‘equality of creditors'), all creditors receive distributions proportionate to their claims. Real security, however, creates a separate class of creditors, with preferential rights to the proceeds of specific assets (the charged assets). Thus, a secured creditor who has obtained a security interest on one or more of the debtor's assets is not affected by this pari passu principle. In other words, where the law allows a creditor to obtain effective security, this will considerably reduce the risk that he will suffer losses when the loan is not fully repaid at the agreed time. The corresponding benefit for debtors granting security is that they may obtain credit in a manner (amount, term) which otherwise would not be available to them or only at higher costs (interest). Also, in ancient Rome the primary reason for taking security cannot have been anything else than maximizing the lender's prospects for recovery, and so it is likely to have facilitated the borrower's access to credit.^[145] ^{^[146] ^[147] Depersonalizing credit relationships: impersonal exchange
In economic studies it is often emphasized that economic development is facilitated by legal and other social institutions that support impersonal exchange.17⁸ The Roman law of real security may have facilitated impersonal exchange in financial transactions and may thus have contributed to economic growth in the Roman empire. In particular Verboven, however, has demonstrated that highly personalized relationships based on amicitia (‘friendship') played an important role in the Roman economy.
Amicitia was not merely a relationship based on mutual affection and altruism, it could also involve the exchange of money, goods, and services. In many cases, the exchange aspect was even the raison d’etre of the amicitia relationship. In financial transactions amicitia entailed that one friend helped out another, by providing interest-free loans or at low(er) interestTh⁹ Also productive loans at higher interest (but still on more favourable terms) were preferably obtained from friends. Amicitia would provide the lender with an extra guarantee that repayment would take place, while it would protect the debtor from excessive interest rates and allow him to count on more leniency when unable to repay the loan in time.^[148] ^{^[149] ^[150] ^[151] ^[152] However, if amicitia was as pervasive in the financial world as Verboven claims it to be, one wonders how the substantial evidence for real security can be explained.^ Precisely real security enables a lender to provide credit outside the circle of his relatives, friends, and their dependants. The law of real security may have provided a mechanism of bringing lenders and borrowers together who otherwise would not have engaged in credit transactions. The lender's lack of information as to the borrower's creditworthiness is much less a concern when the value of the collateral will be sufficient to cover the debt.18² The Roman law of real security may have facilitated impersonal exchange in financial transactions and may thus have contributed to economic growth in the Roman empire. To put it differently, the existence of a large body of fragments in the Digest and the Codex on real security at least suggests that many credit relationships were depersonalized.^³ Zero-sum game or redistribution of wealth to secured creditors?
From a macroeconomic perspective, the most important advantage of the microeconomic function of risk reduction is that it increases available credit, which leads to higher investment, increased production, and ultimately a higher gross domestic product.^⁴ A fundamental objection, however, which has been raised against the efficiency of real security is that secured credit involves a zero-sum game: interest rate savings for debtors granting security are wiped out by corresponding interest rate increases for debtors unable to offer security.18⁵ So-called redistributive theories even hold that the benefit of lower interest rates is acquired at the expense of non-secured creditors, who will receive less in the insolvency of a debtor who has granted security rights to one or more other creditors.
The growing empirical literature on the use of secured credit, however, refutes these redistributive theories and demonstrates that, as Armour states, ‘secured credit is, on the whole, socially beneficial, and that such benefits are highly likely to outweigh the social costs of any transaction motivated by redistribution’.^[153] Armour argues that granting security, by facilitating monitoring and bonding, reduces the probability of the debtor engaging in risky wealth-reducing transactions and thus increases the value of all creditors’ claims.^⁷ Some years ago it was argued that, in the more than thirty years of debate since the Jackson/Kronman article, ‘a comprehensive justification of secured commercial credit on efficiency grounds is unproven and perhaps not provable’?88 However, legal history seems to provide strong indications that security is efficient. As McCormack has put it:
an inefficiency conclusion would go against the grain of history. Security devices are widespread and pervasive not only in the modern industrialized world but also in ancient societies, and one might ask the rhetorical question: why does secured credit persist for so long if it is inefficient?^⁹
This conclusion is supported by quantitative research, which underscores ‘the importance of laws relating to the pledgeability of assets as a driver of credit supply?⁹⁰}}

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Source: Verhagen Hendrik L.. Security and Credit in Roman Law: The Historical Evolution of Pignus and Hypotheca. Oxford University Press,2022. — 448 p.. 2022

Roman Law of Real Security

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