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Collateral value and forbearance lending

Chen, Nan-Kuang and Chu, Hsiao-Lei (2003) Collateral value and forbearance lending. CEPDP, 603. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 0753016818

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Identification Number: 603

Abstract

We investigate the foreclosure policy of collateral-based loans in which the endogenous collateral value plays a crucial role. If creditors are able to commit, then the equilibrium arrangement is more likely to feature forebearance lending by specifying a lower level of liquidation (or roll over all of the loans) relative to the expost efficiency criterion for each realization of the interim signal. The key is that collateral value may drop too low when banks call in loans by auctioning off borrowers¿ collateral and this makes clearing up non-performing loans less attractive. We attribute the banks¿ leniency as we have observed in Japan during the 1990s to an equilibrium arrangement where banks can commit due to either relationship banking or an implicit lenderborrower contract, such as the arrangement under Japan¿s main-bank system.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2003 the authors
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 28 Jul 2008 10:03
Last Modified: 01 Oct 2010 09:13
URI: http://eprints.lse.ac.uk/id/eprint/20004

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