2009
19/2009
Screening in the credit market when the collateral value is stochastic
Author(s): Juha-Pekka Niinimäki
2009. 29 pages.
Publisher: Bank of Finland
ISBN 978-952-462-522-7 (Printed publication)
ISBN 978-952-462-523-4 (Web publication)
Search words: banking, collateral, screening, signalling, subprime lending, G21, G22, G28, Juha-Pekka Niinimäki
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.