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Collateral Value and Forbearance Lending

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Author Info
Nan-Kuang Chen
Hsiao-Lei Chu
Abstract

We investigate the foreclosure policy of collateral-based loans in which the endogenous collateral value plays acrucial role. If creditors are able to commit, then the equilibrium arrangement is more likely to featureforebearance lending by specifying a lower level of liquidation (or roll over all of the loans) relative to the expostefficiency criterion for each realization of the interim signal. The key is that collateral value may drop toolow when banks call in loans by auctioning off borrowers¿ collateral and this makes clearing up non-performingloans less attractive. We attribute the banks¿ leniency as we have observed in Japan during the 1990s to anequilibrium arrangement where banks can commit due to either relationship banking or an implicit lenderborrowercontract, such as the arrangement under Japan¿s main-bank system.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0603.

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Date of creation: Dec 2003
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Handle: RePEc:cep:cepdps:dp0603

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Related research
Keywords: Collateral value; forbearance lending; government guarantee.;

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
G3 - Financial Economics - - Corporate Finance and Governance

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  7. McKinnon, Ronald I. & Pill, Huw, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," World Development, Elsevier, vol. 26(7), pages 1267-1282, July. [Downloadable!] (restricted)
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  18. Mori, Naruki & Shiratsuka, Shigenori & Taguchi, Hiroo, 2001. "Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 53-102, February. [Downloadable!]
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