The impossibility of effective enforcement mechanisms in collateralized credit markets

Thiago Revil T. Ferreira and Juan Pablo Torres-Martinez

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze the possibility of the simultaneous presence of three key features in price-taking credit markets: infinity horizon, collateralized credit operations and effective additional enforcement mechanisms, i.e. those implying payments besides the value of the collateral guarantees. We show that these additional mechanisms, instead of strengthening, actually weaken the restrictions that collateral places on borrowing. In fact, when collateral requirements are not large enough in relation to the effectiveness of the additional mechanisms, lenders anticipate total payments exceeding the value of the collateral requirements. Thus, by non-arbitrage, they lend more than the value of these guarantees. In turn, in the absence of other market frictions such as borrowing constraints, agents may indefinitely postpone their debts, implying the collapse of the agent's maximization problem and of such credit markets.

Keywords: Effective default enforcements; Collateral guarantees; Individual's optimality (search for similar items in EconPapers)
JEL-codes: D52 D53 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/13781/1/MPRA_paper_13781.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/18294/1/MPRA_paper_18294.pdf revised version (application/pdf)

Related works:
Journal Article: The impossibility of effective enforcement mechanisms in collateralized credit markets (2010)
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:pra:mprapa:13781

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().