Does collateral fuel moral hazard in banking?

J.-P. Niinimäki

Journal of Banking & Finance, 2009, vol. 33, issue 3, 514-521

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.

Keywords: Collateral; Subprime; lending; Financial; crises; Deposit; insurance; Moral; hazard (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:3:p:514-521

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