Finance and Credit
 

Collateral sufficiency as an adapt financial covenant in bank crediting

Vol. 24, Iss. 6, JUNE 2018

Received: 23 April 2018

Received in revised form: 7 May 2018

Accepted: 21 May 2018

Available online: 30 June 2018

Subject Heading: Banking

JEL Classification: G21

Pages: 1449—1468

https://doi.org/10.24891/fc.24.6.1449

Karminskii A.M. National Research University Higher School of Economics, Moscow, Russian Federation
karminsky@mail.ru

https://orcid.org/0000-0001-8943-4611

Khon O.D. National Research University Higher School of Economics – Saint Petersburg, St. Petersburg, Russian Federation
okhon@hse.ru

https://orcid.org/0000-0002-8946-2230

Importance The article examines the loan-to-value ratio in three dimensions. First, as a measure of leverage, helpful to understand the spread of systemic risk in the economy. Second, we identify LTV throughout financial covenants. Finally, we implement LTV to indicate the probability of default.
Objectives The goal of the paper is to study the impact of collateral sufficiency on credit risk throughout adjusted financial covenants for bank corporate loans.
Methods To conduct the research, the authors implement econometric methods, linear regressions and binary models.
Results We have revealed the prevalence of the posterior theory of the impact of the collateral sufficiency on the credit risk evaluation by corporate loans. We have also revealed that the higher credit risks, the higher collateral requirements to pledge the loans.
Conclusions and Relevance We have considered a new approach to identify collateral requirements, throughout LTV measures, as adjusted financial covenants on the Russian market. Lender’s preferences are being stronger at the time of downturns in economic activity. At the same time, economic growth neutralizes any visible behavioral favors/patterns. Hereby psychological risk components are quite essential, and need studying in modern banking.

Keywords: credit risk, collateral, loan-to-value, adapt financial covenant, bank loan

References:

  1. Reinhart C., Rogoff K. The Aftermath of Financial Crises. The American Economic Review, 2009, vol. 99, iss. 2, pp. 466–472. URL: Link
  2. Berger A.N., Frame W.S., Ioannidou V. Reexamining the Empirical Relation between Loan Risk and Collateral: The Roles of Collateral Liquidity and Types. Journal of Financial Intermediation, 2016, no. 26, pp. 28–46. URL: Link
  3. Karminsky A.M., Polozov A.A. Handbook of Ratings: Approaches to Ratings in the Economy, Sports, and Society. Springer International Publishing AG, 2016, 356 p. URL: Link
  4. Claessens S. An Overview of Macroprudential Policy Tools. Annual Review of Financial Economics, 2015, vol. 7, pp. 397–422.
  5. Shiller R.J. Irrational Exuberance, Third Edition. Princeton, NJ: Princeton University Press, 2015, 358 p. URL: Link
  6. Fostel A., Geanakoplos J. Endogenous Collateral Constraints and the Leverage Cycle. Annual Review of Economics, 2014, no. 6, pp. 771–799. URL: Link
  7. Brunnermeier M.K. Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic Perspective, 2009, vol. 23, iss. 1, pp. 77–100. URL: Link
  8. Gorton G., Metrick A. Securitized Banking and the Run on Repo. Journal of Financial Economics, 2012, vol. 104, iss. 3, pp. 425–451. URL: Link
  9. Karminskii A.M., Khon O.D. [Collateral Determinants in Bank Risk Management: The Regional Case]. Vestnik MGIMO – Universiteta, 2018, no. 1, pp. 169–185. (In Russ.) URL: Link
  10. Niinimäki J.-P. Collateral in Credit Rationing in Markets with Asymmetric Information. The Quarterly Review of Economics and Finance, 2018, no. 68, pp. 97–102. URL: Link
  11. Dermine J. Basel III Leverage Ratio Requirement and the Probability of Bank Runs. Journal of Banking and Finance, 2015, no. 53, pp. 266–277. URL: Link
  12. Bouheni F.B., Hasnaoui A. Cyclical Behavior of the Financial Stability of Eurozone Commercial Banks. Economic Modelling, 2017, no. 67, pp. 392–408. URL: Link
  13. Kim H., Cho H., Ryu D. Characteristics of Mortgage Terminations: An Analysis of a Loan-Level Dataset. The Journal of Real Estate Finance and Economics, 2017, pp. 1–30. URL: Link
  14. Allen J., Grieder T., Peterson B. et al. The Impact of Macroprudential Housing Finance Tools in Canada. Journal of Financial Intermediation, 2017. URL: Link
  15. Saunders A., Song K. Bank Monitoring and CEO Risk-Taking Incentives. Journal of Banking and Finance, 2018, no. 88, pp. 225–240. URL: Link
  16. Rajan R., Winton A. Covenants and Collateral as Incentives to Monitor. The Journal of Finance, 1995, vol. 50, iss. 4, pp. 1113–1146. URL: Link
  17. Koulafetis P. Modern Credit Risk Management: Theory and Practice. Springer Nature, 2017, 234 p.
  18. Billett M.T., Esmer B., Yu M. Creditor Control and Product-Market Competition. Journal of Banking and Finance, 2018, no. 86, pp. 87–100. URL: Link
  19. Bradley M., Roberts M.R. The Structure and Pricing of Corporate Debt Covenants. Quarterly Journal of Finance, 2015, vol. 5, iss. 2. URL: Link
  20. Billett M.T., Dolly King T.H., Mauer D.C. Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants. The Journal of Finance, 2007, vol. 62, iss. 2, pp. 697–730.
  21. Myers S.C. Finance, Theoretical and Applied. Annual Review of Financial Economics, 2015, no. 7, pp. 1–34.
  22. Lambrecht B.M., Myers S.C. Agency Dynamics in Corporate Finance. Annual Review of Financial Economics, 2016, no. 8, pp. 53–80.
  23. Prilmeier R. Why Do Loans Contain Covenants? Evidence from Lending Relationships. Journal of Financial Economics, 2017, vol. 123, iss. 3, pp. 558–579. URL: Link
  24. Carrizosa R., Ryan S.G. Borrower Private Information Covenants and Loan Contract Monitoring. Journal of Accounting and Economics, 2017, vol. 64, iss. 2–3, pp. 313–339. URL: Link
  25. Wang J. Debt Covenant Design and Creditor Control Rights: Evidence from the Tightest Covenant. Journal of Corporate Finance, 2017, no. 44, pp. 331–352. URL: Link
  26. Karminskii A.M., Karminskii S.A., Nesterov V.P. et al. Informatizatsiya biznesa: kontseptsii, tekhnologii, sistemy [Business information: concepts, technologies, systems]. Moscow, Finansy i Statistika Publ., 2004, 624 p. URL: Link
  27. Thaler R.H., Sunstein C.R. Nudge. Arkhitektura vybora. Kak uluchshit' nashi resheniya o zdorov'e, blagosostoyanii i schast'e [Nudge. Improving Decisions about Health, Wealth and Happiness]. Moscow, Mann, Ivanov i Ferber Publ., 2017, 240 p.
  28. Gorelaya N.V. [Evaluation of the impact of factors on loan pricing]. Korporativnye finansy = Journal of Corporate Finance Research, 2016, no. 1, pp. 59–76. URL: Link (In Russ.)
  29. Brick I.E., Palia D. Evidence of Jointness in the Terms of Relationship Lending. Journal of Financial Intermediation, 2007, vol. 16, iss. 3, pp. 452–476. URL: Link
  30. Godlewski C.G., Weill L. Does Collateral Help Mitigate Adverse Selection? A Cross-Country Analysis. Journal of Financial Services Research, 2011, vol. 40, iss. 1-2, pp. 49–78.

View all articles of issue

 

ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

Journal current issue

Vol. 24, Iss. 10
October 2018

Archive