Does collateral fuel moral hazard in banking? |
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Authors: | J-P Niinimäki |
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Institution: | Department of Economics, Helsinki School of Economics, PB 1210, FIN-00101, Helsinki, Finland |
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Abstract: | 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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Keywords: | G21 G28 |
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