Loan insurance, market liquidity, and lending standards

Toni Ahnert and Martin Kuncl

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine loan insurance when lenders can screen at origination, learn loan quality over time, and can sell loans in secondary markets. Loan insurance reduces lending standards but improves market liquidity. Lenders with worse screening ability insure, which commits them to not exploiting future private information about loan quality and improves the quality of uninsured loans traded. This externality implies insufficient insurance. A regulator achieves constrained efficiency by (i) guaranteeing a minimum price of uninsured loans to eliminate a welfare-dominated illiquid equilibrium; and (ii) subsidizing loan insurance in the liquid equilibrium. Our results can inform the design of government-sponsored mortgage guarantees.

Keywords: loan insurance; adverse selection; screening; market liquidity (search for similar items in EconPapers)
JEL-codes: G00 G21 G28 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2020-03-05
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/118918/ Open access version. (application/pdf)

Related works:
Working Paper: Loan Insurance, Market Liquidity, and Lending Standards (2019)
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: https://EconPapers.repec.org/RePEc:ehl:lserod:118918

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().