Screening in the credit market when the collateral value is stochastic
AbstractThis theoretical paper explores screening with loan collateral when both the collateral value and the probability of project success fluctuate. Some model versions challenge the classic findings of Bester (1985) by showing that high-risk borrowers may in such case be more willing to pledge collateral than low-risk borrowers. Abundant collateral then would not signal low risk. The results may help explain the mixed empirical findings on the role of collateral. The paper also extends the analysis of the topical subprime crises and risky real estate collateral.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 19/2009.
Length: 29 pages
Date of creation: 02 Sep 2009
Date of revision:
banking; collateral; screening; signalling; subprime lending;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-11 (All new papers)
- NEP-BAN-2009-09-11 (Banking)
- NEP-URE-2009-09-11 (Urban & Real Estate Economics)
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