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Does collateral fuel moral hazard in banking?

  • Niinimäki, J.-P.
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    This 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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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 3 (March)
    Pages: 514-521

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:3:p:514-521
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    12. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "The evolution of the subprime mortgage market," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-56.
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