Research Discussion Papers, Bank of Finland
No 19/2009:
Screening in the credit market when the collateral value is stochastic
Juha-Pekka Niinimäki ()
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.
Keywords: banking; collateral; screening; signalling; subprime lending; (follow links to similar papers)
JEL-Codes: G21; G22; G28; (follow links to similar papers)
29 pages, September 2, 2009
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