Economics at your fingertips  

Loan Insurance, Market Liquidity, and Lending Standards

Toni Ahnert () and Martin Kuncl

No 14458, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine loan insurance--credit risk transfer upon origination--in a model in which lenders can screen, learn loan quality over time, and can sell loans. Some lenders with low screening ability insure, benefiting from higher market liquidity of insured loans while forgoing the option to exploit future information about loan quality. Insurance also improves the quality of uninsured loans traded but lowers lending standards. We derive testable implications about loan insurance. Since lenders do not internalize its benefit for market liquidity, loan insurance is insufficient and should be subsidized. Our results can inform the design of government-sponsored mortgage guarantees.

Keywords: Adverse Selection; liquidity; Loan insurance; Risk transfer; screening (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

Related works:
Working Paper: Loan Insurance, Market Liquidity, and Lending Standards (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This working paper can be ordered from ... rs/dp.php?dpno=14458

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

Page updated 2021-07-30
Handle: RePEc:cpr:ceprdp:14458