Fire Sale Risk and Credit

Wolf Wagner, Dion Bongaerts and Francesco Mazzola

No 15798, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines whether the risk of a future collateral fire sale affects lending decisions. We study US mortgage applications and exploit exogenous variation in foreclosure frictions for identification. We find lenders to be less likely to approve mortgages when anticipated losses due to uncoordinated collateral liquidations are high, and when there iselevated risk of joint collateral liquidation. These results suggest that fire-sale risk has implications for credit allocation, and that lenders' collective origination decisions mitigate fire sale risk ex-post. However, we also find the effects to be significantly weaker outside periods in which fire sales are salient.

Keywords: Fire sales; Credit supply; Foreclosure laws; Creditor concentration; Joint liquidation risk; Collateral (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-ure
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