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Nominal and true cost of loan collateral

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  • Niinimäki, J.-P.
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    Abstract

    This paper explores costs and proceeds from loan collateral in the credit market with ex-ante asymmetric information when collateral value and the probability of project success fluctuate. A borrower is willing to pledge collateral if (i) its future value is correlated with the probability of project success, or (ii) its value fluctuates strongly, or (iii) it is funded with loan capital. When one of the conditions is satisfied, in contrast to Bester (1985), a high-risk borrower may be more willing to pledge collateral than a low-risk borrower. The paper is related to topical subprime crises and real estate collateral.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 10 (October)
    Pages: 2782-2790

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:10:p:2782-2790

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Banking Collateral Screening Signalling Subprime crisis;

    References

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    3. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
    4. Sommervoll, Dag Einar & Borgersen, Trond-Arne & Wennemo, Tom, 2010. "Endogenous housing market cycles," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 557-567, March.
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    9. Grunert, Jens & Weber, Martin, 2009. "Recovery rates of commercial lending: Empirical evidence for German companies," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 505-513, March.
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    11. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
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    13. Hans Degryse & Partick Van cayseele, 1998. "Relationship Lending within a Bank-based System: Evidence from European Small Business Data," Center for Economic Studies - Discussion papers ces9816, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    14. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
    15. Igawa, Kazuhiro & Kanatas, George, 1990. "Asymmetric Information, Collateral, and Moral Hazard," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 469-490, December.
    16. Niinimäki, J.-P., 2009. "Does collateral fuel moral hazard in banking?," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 514-521, March.
    17. Jiménez, Gabriel & Salas, Vicente & Saurina, Jesús, 2009. "Organizational distance and use of collateral for business loans," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 234-243, February.
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    19. Koetter, Michael & Poghosyan, Tigran, 2010. "Real estate prices and bank stability," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1129-1138, June.
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