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Screening in the credit market when the collateral value is stochastic

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Author Info
Niinimäki, Juha-Pekka () (Bank of Finland Research)
Abstract

This 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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File URL: http://www.bof.fi/NR/rdonlyres/880CCEC5-3564-4140-AB99-29AD5F7C3D39/0/0919netti.pdf
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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2009.

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Length: 29 pages
Date of creation: 02 Sep 2009
Date of revision:
Handle: RePEc:hhs:bofrdp:2009_019

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: banking; collateral; screening; signalling; subprime lending;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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This page was last updated on 2009-12-3.

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