Showing papers on "Collateral published in 2005"

The Economics of Microfinance

Abstract: The microfinance revolution, begun with independent initiatives in Latin America and South Asia starting in the 1970s, has so far allowed 65 million poor people around the world to receive small loans without collateral, build up assets, and buy insurance. This comprehensive survey of microfinance seeks to bridge the gap in the existing literature on microfinance between academic economists and practitioners. Both authors have pursued the subject not only in academia but in the field; Beatriz Armendariz founded a microfinance bank in Chiapas, Mexico, and Jonathan Morduch has done fieldwork in Bangladesh, China, and Indonesia. The authors move beyond the usual theoretical focus in the microfinance literature and draw on new developments in theories of contracts and incentives. They challenge conventional assumptions about how poor households save and build assets and how institutions can overcome market failures. The book provides an overview of microfinance by addressing a range of issues, including lessons from informal markets, savings and insurance, the role of women, the place of subsidies, impact measurement, and management incentives. It integrates theory with empirical data, citing studies from Asia, Africa, and Latin America and introducing ideas about asymmetric information, principal-agent theory, and household decision making in the context of microfinance. The Economics of Microfinance can be used by students in economics, public policy, and development studies. Mathematical notation is used to clarify some arguments, but the main points can be grasped without the math. Each chapter ends with analytically challenging exercises for advanced economics students.

Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective

Abstract: In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the United States, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains 80% of the cross-sectional variation in annual size and book-to-market portfolio returns. HOUSE PRICE FLUCTUATIONS PLAY AN IMPORTANT ROLE in explaining the time-series and the cross-sectional variation in asset returns. Given the magnitude of the housing market, this is unsurprising. This paper shows that the way in which housing affects asset returns is through the role of housing as a collateral asset. We identify a novel collateral channel that transmits shocks in the housing market to risk premia. In a model with collateralized borrowing and lending, the ratio of housing wealth to human wealth, the housing collateral ratio, changes the conditional distribution of consumption growth across households. When the collateral ratio is low, the dispersion of consumption growth across households is more sensitive to aggregate consumption growth shocks, and this raises the market price of aggregate risk.

Financial Distress and Bank Restructuring of Small to Medium Size UK Companies

Abstract: We use a unique data set to study how U.K. banks deal with financially distressed small and medium-sized companies under a ‘contractualist’ bankruptcy system. Unlike in the U.S., these procedures limit the discretion of courts to strict enforcement of debt contracts, without any dilution of creditors’ claims. We show that lenders and borrowers select a debt structure that avoids some of the market failures often attributed to a contractualist system. Collateral and liquidation rights are highly concentrated in the hands of the main bank, giving it a dominant position in restructuring or liquidating a defaulting firm. There is little litigation, and no evidence of co-ordination failures or creditors’ runs. However, there is some evidence that the bank’s dominance makes it ‘lazy’ in monitoring, relying heavily on the value of its collateral in timing the bankruptcy decision.

Risk Rationing and Wealth Effects in Credit Markets

Abstract: By shrinking the available menu of loan contracts, asymmetric information can result in two types of non- price rationing in credit markets. The first is conventional quantity rationing. The second is 'risk rationing.' Risk rationed agents are able to borrow, but only under relatively high collateral contracts that offer them lower expected well-being than a safe, reservation rental activity. Like quantity rationed agents, credit markets do not perform well for the risk rationed. While the incidence of conventional quantity rationing is straightforward (low wealth agents who cannot meet minimum endogenous collateral requirements are quantity rationed), the incidence of risk rationing is less straightforward. Increases in financial wealth, holding productive wealth constant, counter intuitively result in the poor becoming entrepreneurs and the wealthy becoming workers. While this counterintuitive puzzle has been found in the literature on wealth effects in principal-agent models, we show that a more intuitive pattern of risk rationing results if we consider increases in productive wealth. Empirical evidence drawn from four country studies corroborates the implications of the analysis, showing that agents with low levels of productive wealth are risk rationed, and that their input and output levels mimic those of low productivity quantity rationed firms.

The Role of Collateralized Household Debt in Macroeconomic Stabilization

Abstract: Market innovations following the flnancial reforms of the early 1980’s relaxed collateral constraints on household borrowing. This paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of realistically lowering required down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.

Transactions Accounts and Loan Monitoring

Abstract: We show that transactions accounts, by providing ongoing data on borrowers’ activities, help financial intermediaries monitor borrowers. This information is most readily available to commercial banks, which offer these accounts and lending together. We find that (1) monthly changes in accounts receivable are reflected in transactions accounts; (2) borrowings in excess of collateral predict credit downgrades and loan write-downs; and (3) the lender intensifies monitoring in response. This is evidence on a key issue in financial intermediation—there is an advantage to providing deposit-taking and lending jointly. But this advantage may have fallen as the cost of communication has declined. (JEL G10, G20, G21) Transactions are inherently informative. Thus, observing transactions should help financial intermediaries monitor borrowers. But how precisely? We provide evidence that information on the cash flows into and out of a borrower’s transactions account can help an intermediary monitor the changing value of collateral that a commercial borrower has posted for an operating loan. We analyze a unique set of data that includes monthly and annual information on transactions account balances and posted collateral—namely, accounts receivable and inventories—for small-business borrowers at a Canadian bank that wishes to remain anonymous.

The Role of Collateralized Household Debt in Macroeconomic Stabilization

Abstract: Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of lowering required down payments and rates of amortization for durable goods purchases as in the early 1980s. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.

How Law and Institutions Shape Financial Contracts: The Case of Bank Loans

Abstract: We examine empirically how legal origin, creditor rights, property rights, legal formalism, and financial development affect the design of price and non-price terms of bank loans in almost 60 countries. Our results support the law and finance view that private contracts reflect differences in legal protection of creditors and the enforcement of contracts. Loans made to borrowers in countries where creditors can seize collateral in case of default are more likely to be secured, have longer maturity, and have lower interest rates. We also find evidence, however, that ?Coasian? bargaining can partially offset weak legal or institutional arrangements. For example, lenders mitigate risks associated with weak property rights and government corruption by securing loans with collateral and shortening maturity. Our results also suggest that the choice of loan ownership structure affects loan contract terms.

Houses as Collateral: Has the Link between House Prices and Consumption in the U.K. Changed?

Abstract: A paper presented at the April 2001 conference "Financial Innovation and Monetary Transmission," sponsored by the Federal Reserve Bank of New York.

Financial Challenges Facing Urban SMEs under Financial Sector Liberalization in Ghana

Abstract: The paper examines the impact of financial sector liberalization (FSL) policies on the financial management of small and medium-sized enterprises (SME) in Ghana, using six case studies. Its findings, which confirm and extend the conclusions of previous studies, are integrated into a framework that explains the impact of FSL and the factors at work. The main financial challenge facing SMEs is access to affordable credit over a reasonable period. This is determined by the financing needs of SMEs and the action of investors. SME financing needs reflect their operational requirements, while the action of investors depends on their risk perception and the attractiveness of alternative investment (which affects their willingness to invest). Government borrowing, the general economic climate, availability of collateral, quality of SME record keeping, and SME investor relations skills affect the way in which this challenge is managed. The impact of the activities and potential of enterprise development agencies are also discussed.

Stock and real estate prices in Greece: wealth versus ‘credit-price’ effect

Abstract: An attempt is made to clarify the relationship between price fluctuations of two major assets in Greece, real estate and stocks. Two mechanisms have been proposed to interpret this relationship. The first one is well known as ‘wealth effect’, which claims that households with unanticipated gains in share prices tend to increase the amount of housing. The second one is the credit price effect, which claims that a rise in real estate prices can stimulate economic activity, future profitability of firms and, as a consequence, stock market prices by raising the value of collateral and reducing the cost of borrowing for both firms and households. To test the above transmission, channel tests of Granger causality are employed. Empirical findings are in favour of the wealth effect hypothesis for Athens real estate prices but not for other urban real estate prices. Since real estate at the Athens Metropolitan area could be considered as an investment vehicle, it is reasonable to argue that higher stock prices inc...

The Financial Accelerator: Evidence from International Housing Markets

Abstract: This paper shows novel evidence on the mechanism through which financial constraints amplify fluctuations in asset prices and credit. It does so using contractual features of housing finance. Among agents whose housing demand is constrained by the availability of collateral, those who can borrow against a larger fraction of their housing value (achieve a higher loan-to-value, or LTV, ratio) have more procyclical debt capacity. This procyclicality underlies the financial accelerator mechanism described by Stein (1995) and Bernanke et al. (1996). Our study uses international variation in maximum LTV ratios over three decades to test whether (a) housing prices and (b) demand for new mortgage borrowings are more sensitive to income shocks in countries where households can achieve higher LTV ratios. The results we obtain are consistent with the dynamics of a collateral-based financial accelerator in housing markets.

Derivatives and Systemic Risk: Netting, Collateral, and Closeout

Abstract: In the U.S., as in most countries with well-developed securities markets, derivative securities enjoy special protections under insolvency resolution laws. Most creditors are "stayed" from enforcing their rights while a firm is in bankruptcy. However, many derivatives contracts are exempt from these stays. Furthermore, derivatives enjoy netting and close-out, or termination, privileges which are not always available to most other creditors. The primary argument used to motivate passage of legislation granting these extraordinary protections is that derivatives markets are a major source of systemic risk in financial markets and that netting and close-out reduce this risk. To date, these assertions have not been subjected to rigorous economic scrutiny. This paper critically reexamines this hypothesis. These relationships are more complex than often perceived. We conclude that it is not clear whether netting, collateral, and/or close-out lead to reduced systemic risk, once the impact of these protections on the size and structure of the derivatives market has been taken into account.

The Financial Accelerator: Evidence from the International Housing Markets*

Abstract: This paper shows novel evidence on the mechanism through which …nancial constraints amplify ‡uctuations in asset prices and credit demand. It does so using contractual features of housing …nance. Among agents whose housing demand is constrained by the availability of collateral, those who can borrow against a larger fraction of their housing value (achieve a higher loan-to-value, or LTV, ratio) have more procyclical debt capacity. This procyclicality underlies the …nancial accelerator mechanism described by Stein (1995) and Bernanke et al. (1996). Our study uses international variation in maximum LTV ratios over three decades to test whether (a) housing prices and (b) demand for new mortgage borrowings are more sensitive to income shocks in countries where households can achieve higher LTV ratios. The results we obtain are consistent with the dynamics of a collateral-based …nancial accelerator in housing markets.

Determinants of bank net interest margins in southeast asia

Abstract: This paper investigates the determinants of net interest margins (NIM) of banks in four Southeast Asian countries using the dealer model (Ho and Saunders, The Journal of Financial and Quantitative Analysis, 16(4), pp 581–600, 1981) and by running two-step regressions. Results of the first regression indicate that the region's NIM are partially explained by bank-specific factors namely operating expenses, capital, loan quality, collateral and liquid assets. Second step regression results show that while NIM manifest sensitivity to changes in short-term interest rates, they are still largely explained by the non-competitive structure of the region's banking systems. Furthermore, there is evidence that the NIM declined after 1997 thus reflecting the profit squeeze experienced by the region's banks in the aftermath of the Asian currency and banking crises.

Collateral Consequences and Racial Inequality: Felon Status Restrictions as a System of Disadvantage

Abstract: Studies of the collateral consequences of felony conviction have generally focused on single restrictions such as disenfranchisement or disqualification for welfare assistance. Although these studies have provided a wealth of valuable information, such an approach only provides a partial picture of the broader social context in which collateral sanctions operate and their implications for social stratification. Even after felons complete their sentences, they often find whole classes of key privileges revoked and opportunities blocked. Furthermore, because they are most likely to experience criminal justice sanctions, Black males are at far greater risk of also facing the social disadvantages that accompany criminal punishment. This article argues that collateral consequence provisions play a role in maintaining and exacerbating racial inequality.

System and Method for Efficiently Using Collateral for Risk Offset

Abstract: A system and method for analyzing correlation between the assets given by the trader for collateral and that trader's open positions is disclosed. Thus, if the collateral is correlated to the trader's open positions, then some offset can be given. If there is no correlation than the collateral is valued in the conventional way. For example, if a trader provides t-bills as collateral for an account that has open positions (e.g. short futures) in T-bills, than that trader's account can be credited with some offset since the value of T-bills and T-bill futures are highly correlated.

How the Eurosystem's Treatment of Collateral in its Open Market Operations Weakens Fiscal Discipline in the Eurozone (and What to Do About it)

Abstract: Market interest rates on sovereign debt issued by the 12 Eurozone national governments differ very little from each other, despite the credit ratings of these governments ranging from triple A to single A, and despite significant differences among their objective indicators of fiscal-financial sustainability. We argue that this market failure is at least in part due to a policy failure: the operational practices of the European Central Bank and the rest of the Eurosystem in its collateralised open market operations convey the message that the Eurosystem views the debt of the 12 Eurozone sovereigns as equivalent. The euro-denominated debt instruments of all twelve Eurozone governments are deemed to be eligible for use as collateral in collateralised lending by the Eurosystem. They are in addition allocated to the same (highest) liquidity category (Tier One, Category 1) as the debt instruments of the Eurosystem itself and subject to the lowest 'valuation haircut' (discount on the market value). Haircuts also increase with the remaining time to maturity. This discourages the use as collateral of longer maturity debt which would be more likely to reveal differences in sovereign default risk. We propose that the size of the haircut on each debt instrument be related inversely to its credit rating. A further re-enforcement of the market's ability to penalise and constrain unsustainable budgetary policies would be to declare the sovereign debt of nations that violate the conditions of the Stability and Growth Pact to be ineligible as collateral in Eurosystem Repos.

Information Asymmetry and Trust: A Framework for Studying Microfinance in India

Abstract: In recent times, microfinance has emerged as a major innovation in the rural financial marketplace. Microfinance largely addresses the issue of access to financial services. In trying to understand the innovation of microfinance and how it has proved to be effective, the author looks at certain design features of microfinance. He first starts by identifying the need for financial service institutions which is basically to bridge the gap between the need for financial services across time, geographies, and risk profiles. In providing services that bridge this gap, formal institutions have limited access to authentic information both in terms of transaction history and expected behaviour and, therefore, resort to seeking excessive information thereby adding to the transaction costs. The innovation in microfinance has been largely to bridge this gap through a series of trustbased surrogates that take the transaction-related risks to the people who have the information — the community through measures of social collateral. In this paper, the author attempts to examine the trajectory of institutional intermediation in the rural areas, particularly with the poor and how it has evolved over a period of time. It identifies a systematic breach of trust as one of the major problems with the institutional interventions in the area of providing financial services to the poor and argues that microfinance uses trust as an effective mechanism to address one of the issues of imperfect information in financial transactions. The paper also distinguishes between the different models of microfinance and identifies which of these models use trust in a positivist frame and as a coercive mechanism. The specific objectives of the paper are to: ae Superimpose the role of trust in various types of exchanges and see how it impacts the effectiveness of repeated transactions. While greater access to information fosters trust and thus helps social networks to reduce transaction costs, there could be limits to which exchanges could solely depend on networks and trust.

A Dynamic Look at Subprime Loan Performance

Abstract: This paper examines the implications of delinquency on the performance of subprime mortgages. Specifically, we examine whether delinquency has any predictive power of the future performance of a mortgage. Using a sample of subprime mortgages from the Loan performance database on securitized private-label pool collateral, we utilize a two-step estimation procedure to control for the endogeneity of delinquency in an estimation of default and prepayment probabilities. We find strong support for the "distressed prepayment" theory that very delinquent loans are more likely to prepay than to default and that the rate of increase of prepayment is substantially larger as delinquency intensity increases. Delinquency predominately leads to termination of a loan through prepayment while negative equity leads to termination through default.

Systems and methods for loan management with variable security arrangements

Abstract: A data processing system, program product, and method is provided for managing at least one credit-granting account of a participant. The system comprises in one embodiment an electronic database including information describing collateral assets of the participant used for securing the credit-granting account, and a computer system comprising one or more processors coupled to the electronic database and programmed among them to establish through an API a credit-granting account with a facility to maintain a plurality of collateral assets as collateral for the credit-granting account; receive new information regarding a collateral asset that is real estate for securing the credit-granting account; determine perfection status of a security interest in the collateral asset; store, in the electronic database, the new information and at least any change in the perfection status; and determine an interest rate to be charged on outstanding credit balances based on the new information regarding the collateral asset available for securing the credit-granting account containing the perfection status. The system further comprises an electronic network access device for sending a signal identifying the new interest rate to an access-vehicle issuing system so that the issuing system can charge the interest rate on outstanding credit balances. In one of the alternative embodiments, the system sends a signal identifying the interest rate to an interest rate program that controls the interest rate for the credit-granting account.

Systemic Risk in Alternative Payment System Designs

Abstract: The paper analyses the consequences of an isolated, sudden and unexpected failure of a bank in alternative interbank payment system designs. We assess the exposures and the contagion by a counterfactual analysis assuming that payments currently settled by the pan-European large-value payment system, TARGET, are settled in alternative payment systems: an unsecured end-of-day net settlement system and a secured net settlement system with limits on intraday credit, with collateral and loss-sharing. The results indicate that systemic consequences of one bank's failure on the solvency of other banks can be rather low. If risk management techniques such as legal certainty for multilateral netting,limits on exposures, collateralisation and loss sharing are introduced, the systemic consequences can be mitigated to a high degree. How, and under which circumstances the analyzed failures would render other banks illiquid to meet their payment obligations is outside the scope of the paper.

The Repurchase Agreement Refined: GCF Repo

Abstract: One of the largest and most important of the money markets is the market for repurchase agreements. In a repurchase agreement, a borrower of money effectively agrees to provide securities as collateral to the lender to mitigate credit risk. GCF Repo is a recent innovation in this market that reduces transaction costs, enhances liquidity, and facilitates the efficient use of collateral.

The Easy Case for the Priority of Secured Claims in Bankruptcy

Abstract: For years, scholars have questioned the efficiency of secured debt, many suggesting that it transfers uncompensated risk to unsecured creditors. This Article argues that the most important form of secured debt, new money credit secured by collateral, tends to create value for unsecured creditors as well as for the debtor. Prior writing on the value of secured debt ignores the distinction between the use and the availability (and subsequent use only if needed) of secured credit. As a result, previous models of secured debt erroneously assumed that a debtor that can borrow on an unsecured basis may well prefer to borrow on a secured basis to reduce interest cost. The Article combines theory and experience to show that those models do not reflect an economically rational debtor. A rational debtor that can borrow unsecured has an economic incentive not to prematurely encumber its assets because doing so gives away value in an amount, which the Article calls Theta, that exceeds any interest cost saving. Perhaps the most significant component of this value is the increased liquidity in times of financial trouble that secured credit affords. The Article also shows that this increased liquidity does not generally keep debtors alive that should be allowed to fail. Bankruptcy creates market imperfections that tend to make lenders reluctant to extend credit, even on a secured basis, to debtors that are likely to go bankrupt. Furthermore, these market imperfections discourage troubled debtors from incurring secured debt unless they can thereby avoid bankruptcy. Secured credit is therefore usually extended in these circumstances only where the liquidity would help the debtor regain viability. Therefore, unsecured creditors should want a debtor to have access to secured credit.

Optimal Stopping and Losses on Subprime Mortgages

Abstract: Lender losses on mortgage loans arise from a two-stage process. In the first stage, the borrower stops making payments if and when default is optimal. The second stage is a lengthy and costly period during which the lender employs legal remedies to obtain possession and execute a sale of the collateral. This research uses data on subprime mortgage losses to explore the role of borrower and collateral characteristics, and local legal requirements, as well as traditional option variables in the decisions of borrowers and lenders. Although subprime borrowers default earlier, which should reduce lender losses, these borrowers, nevertheless, impose greater realized losses on mortgage lenders.

Why House Prices Matter

Abstract: This article analyses the role of house prices in the transmission mechanism of monetary policy. It is argued that house prices matter because houses can be used as collateral, against which households borrow to finance housing investment and consumption. The implication of structural change in UK retail credit markets is also considered, as this may have changed the relationship between house prices and consumption.

Impact of government regulation on microfinance

Abstract: Microfinance, defined as a credit methodology that employs effective collateral substitutes to deliver and recover short-term, working capital loans to microentrepreneurs, has demonstrated success as a poverty reduction strategy. Microfinance was initially developed by and is today still primarily deployed by non-government organizations (NGOs) who receive donor funds and on-lend to microfinance clients (often at subsidized interest rates). In many cases, governments also play a critical role-setting policy for the microfinance industry (most frequently vis-a-vis interest rates), providing lump sum grants to NGOs or other microfinance institutions (MFIs), or lending directly to the poor. Credit unions, cooperatives, commercial banks, and small informal groups (self help groups-SHGs) are other important players in microfinance.

Interest rates, collateral and (de-)interlinkage: a micro-study of rural credit in West Bengal

Abstract: This study, based on a primary field survey in rural West Bengal, analyses the terms and conditions of the differentiated structure of rural credit with the advent of capitalist agriculture within the interventionist state. The sample households are classified according to the economic classes of Patnaik as well as the standard acreage criterion. The possibility of interlinkage between credit and all other structures is remote. The average rate of interest is inversely related to ascending class status. There is a systematic association between rate of interest and the value of collateral on the one hand, and marketability of collateral and interest rates on the other.

How the Eurosystem’s Treatment of Collateral in its Open Market Operations Weakens Fiscal Discipline in the Eurozone (and what to do about it)

Abstract: Market interest rates on sovereign debt issued by the 12 Eurozone national governments differ very little from each other, despite the credit ratings of these governments ranging from triple A to single A, and despite significant differences among their objective indicators of fiscal-financial sustainability. We argue that this market failure is at least in part due to a policy failure: the operational practices of the European Central Bank and the rest of the Eurosystem in its collateralised open market operations convey the message that the Eurosystem views the debt of the 12 Eurozone sovereigns as equivalent. The euro-denominated debt instruments of all twelve Eurozone governments are deemed to be eligible for use as collateral in collateralised lending by the Eurosystem. They are in addition allocated to the same (highest) liquidity category (Tier One, Category 1) as the debt instruments of the Eurosystem itself and subject to the lowest 'valuation haircut' (discount on the market value). Haircuts also increase with the remaining time to maturity. This discourages the use as collateral of longer maturity debt which would be more likely to reveal differences in sovereign default risk. We propose that the size of the haircut on each debt instrument be related inversely to its credit rating. A further re-enforcement of the market’s ability to penalise and constrain unsustainable budgetary policies would be to declare the sovereign debt of nations that violate the conditions of the Stability and Growth Pact to be ineligible as collateral in Eurosystem Repos.

Guidelines for utilizing collateral sources of information in child custody evaluations

Abstract: A structure for utilizing third party or collateral sources of information in the child custody evaluation is discussed. Collateral information is vital to the process of trying to assess the credibility and validity of information obtained from the primary parties in a dispute. Information that is from more neutral parties has higher credibility and when the party has access to key information it produces more discriminant validity. When a source with high discriminant validity agrees with information from a primary party, then it enhances the convergent validity on an issue or hypothesis. Child custody cases are inherently characterized by biased data within the adversarial process. Gathering data from collateral sources and using a system to evaluate their usefulness on confirmation of hypotheses is a necessary part of the emerging forensic-clinical-scientific child custody evaluation paradigm.