Does collateral fuel moral hazard in banking?
AbstractThis paper presents two models in which the fluctuating value of loan collateral (real estate) generates the problem of moral hazard between a bank and a deposit insurance agent. The bank finances risky projects against collateral and relies on the rising collateral value. If the collateral value later appreciates, the bank enjoys handsome profits; otherwise, the bank fails. The findings are rather consistent with the characteristics of the topical subprime mortgage crisis.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 33 (2009)
Issue (Month): 3 (March)
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Web page: http://www.elsevier.com/locate/jbf
Collateral Subprime lending Financial crises Deposit insurance Moral hazard;
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